CENTRAL BANK of ESWATINI | FINANCIAL STABILITY REPORT Issue No

CENTRAL BANK OF SWAZILAND FINANCIAL STABILITY REPORT Issue No. 1 CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3

OF ESWATINI Umntsholi Wemaswati

JUNE 2019 Issue No.3

Central Bank of ESWATINI

FINANCIAL STABILITY REPORT

June 2019 Issue No. 3

FOREWORD

about pertinent issues and assessments pertaining identified vulnerabilities to the financial system.

Recognizing the interlinkages between the macro economy and financial system, the FSR 2019 discusses macro risks and vulnerabilities observed in 2018. Financial stability assessment for this issue revealed that the financial system of Eswatini remained stable, despite emerging risks from domestic and international economic developments over 2018.

Risks from the external environment, particularly from sudden tightening of monetary conditions, alleviated on the back of weak economic growth in the developed economies. Challenges from the domestic and external environment remained elevated but somewhat stable. From the domestic front, fiscal challenges and weak economic growth were vulnerable Majozi V. Sithole points for financial stability. Looking ahead, Governor risks stemming from the domestic economy Chairman - Financial Stability Committee are expected to ease driven by improved economic performance. Purpose of the Financial Stability Report Assessment of the banking sector resilience The mission of the Central Bank of Eswatini (CBE) is to through stress tests reflects a strong foster a stable financial sector conducive to economic banking sector amidst the challenging growth. In accordance with the Constitution of the economic environment. The CBE remains Kingdom of Eswatini Act 2005, specifically sections committed to ensuring that the regulatory 206 (2) (d) and (f), the CBE shall supervise the environment remains conducive for new operations of financial institutions in the Kingdom, and safe innovations in the financial sector. as well as promote monetary stability, a sound and The CBE therefore will continue assessing stable financial structure in the Kingdom of Eswatini. financial sector developments to protect Continuous assessment of domestic and foreign and enhance financial sector resilience economic developments is an important aspect of thereby maintaining financial stability. the CBE’s commitment to ensure that emerging vulnerabilities are identified early to mitigate risks. The CBE appreciates that greater public The publication of the Financial Stability Report (FSR) awareness of financial system vulnerabilities provides a platform to communicate with stakeholders in itself may serve to encourage financial

institutions to curb activities that might environment and the internal and external exacerbate systemic risks and help to promote value of the currency. One way of defining policy reforms to strengthen the resilience of financial stability is in terms of the absence the financial sector. This awareness serves as of systemic risk. Systemic risk is the risk that a motivation to the CBE that issues of financial the default of one institution in the system can stability are priority to all citizens of the lead to the default of one or more otherwise Kingdom of Eswatini. sound institutions, thereby threatening the markets and the economy as a whole. Another Defining “financial stability” informal definition of financial stability may be in terms of what is necessary to achieve it, for Financial stability is not a sufficient but a example, the sound regulatory environment, necessary precondition for sustainable economic effective macro-prudential surveillance and growth. There is no general global consensus on public confidence in the system. the definition for financial stability, but there is general consensus that financial stability is an The Central Bank of Eswatini defines financial important precondition for economic growth, stability as a “condition in which the financial development and employment. system- comprising of financial intermediaries, markets and market infrastructures- is capable Financial stability is more difficult to define of withstanding internal and external shocks than price stability, which simply relates to such that participants have confidence in the among other indicators, a stable inflation system’’.

CONTENTS

1. ESWATINI FINANCIAL SYSTEM AND COBWEB...... 1 1.1 External Environment...... 1 1.2 Domestic Environment...... 2 1.3 Household Sector...... 2 1.4 Corporate Sector...... 2 1.5 Banking Sector...... 2 1.6 Non-bank Financial Sector...... 2 1.7 Payments Systems Stability...... 3 1.8 Heat Map...... 4

2. EXTERNAL ECONOMIC DEVELOPMENTS...... 5 2.1 Global and Regional Economic Developments...... 5 2.2 Global Financial Stability Developments...... 6 2.3 South Africa...... 7 2.3.1 Economic Developments...... 7 2.3.2 Financial Stability...... 7

3. DOMESTIC ECONOMY...... 9 3.1 Economic Growth...... 9 3.2 Inflation and interest rates...... 10 3.3 Fiscal Position...... 12 3.4 Government Debt...... 13 3.5 Gross official Reserves...... 15 3.6 Household Sector...... 16 3.7 Corporate Sector...... 18 3.7.1 Large Corporates...... 19 3.7.2 Micro, Small and Medium Enterprises...... 20 3.7.3 Corporate Debt...... 20 3.7.4 Risks to Corporate Debt...... 22 3.7.5 Profitability...... 23 3.7.6 Risks to Corporate Sector Profitability...... 23

4. DEVELOPMENTS AND RISK ANALYSIS OF THE BANKING SYSTEM...... 25 4.1 Growth of the Banking Sector...... 25 4.2 Capital Adequacy...... 26 4.3 Earnings and Profitability...... 26 4.4 Credit Risk...... 27 4.5 Banks’ Asset Quality...... 27 4.6 Credit and Funding Concentration...... 29 4.7 Banks’ Funding Structure...... 30 4.8 Liquidity Risk...... 31

5. STRESS-TESTING OF THE ESWATINI BANKING SECTOR...... 32 5.1 Credit Risk...... 32 5.2 Default by the Largest Borrowers...... 33 5.3 Liquidity Risk...... 33 5.4 Simulated Bank Run...... 33

5.5 Sudden Withdrawal by the Largest Depositor...... 34 5.6 Banking Sector CAEL Ratings...... 34

6. FINANCIAL MARKETS INFRASTRUCTURE...... 35 6.1 Settlement Windows...... 35 6.2 SWIPSS or Masheshisa...... 36 6.3 SAECH...... 37 6.4 Payment Cards Developments...... 38 6.5 Mobile Money Transfers...... 39 6.5.1 Mobile Money Activity...... 40 6.6 Liquidity Management by SWIPSS Participants...... 41 6.7 Bank Branches and Automated Teller Machines...... 41

7. DEVELOPMENTS IN THE NON-BANKING SECTOR...... 42 7.1 Swaziland Building Society (SBS)...... 42 7.2 Capital Markets in Eswatini...... 42 7.2.1 Collective Investment Schemes...... 42 7.3 Pension Sector Soundness...... 44 7.3.1 Assets...... 44 7.3.2 Asset Composition 2018...... 44 7.3.3 Funding Ratio...... 45 7.3.4 Distribution of Investment Income (as at December 2018)...... 46 7.3.5 Cash flow from operation ratio...... 46 7.3.6 Pension Sector Risk...... 47 7.3.7 Government Arrears...... 48 7.4 Insurance Sector...... 49 7.4.1 Asset Composition...... 50 7.4.2 Interconnectedness in the Financial Sector...... 50 7.4.3 Short-Term Insurance...... 51 7.4.4 Long-Term Insurance...... 51 7.4.5 Interconnectedness in the Financial Sector...... 52

8. FINANCIAL INCLUSION...... 53

9. SPECIAL CHAPTER...... 56 9.1 Interconnectedness Model...... 56 9.1.1 Introduction...... 56 9.1.2 Related Literature Review...... 56 9.1.3 Macro-Network Construction...... 56 9.1.4 Results...... 57 9.1.5 Histogram...... 57 9.1.6 Financial System Centrality Measures...... 58 9.1.7 Hubs and Authorities...... 59 9.1.8 Conclusions...... 60 9.1.9 References...... 61

10. BOXES...... 62

11. STATISTICAL APPENDIX...... 64

FIGURES

Figure 1: Eswatini Financial System Cobweb...... 1 Figure 2: GDP Growth...... 10 Figure 3: Inflation...... 11 Figure 4: Policy Rates and Prime Lending Rates...... 11 Figure 5: Government Revenue Components & Government Expenditure...... 12 Figure 6: Government Revenue Components/Total Revenue Ratio...... 12 Figure 7: Fiscal Position/GDP Ratio and government expenditure...... 13 Figure 8: Government Debt and government securities outstanding...... 14 Figure 9: Composition of Government Debt by Holder...... 14 Figure 10: Debt-to-GDP Ratio...... 15 Figure 11: Gross Official Reserves (12-month moving average)...... 16 Figure 12: Household Loan Portfolio – Commercial Banks...... 16 Figure 13: Household Loans by Type...... 17 Figure 14: Household Indebtedness...... 17 Figure 15: Household Overdue and Non-Performing Loans...... 18 Figure 16: Assets - Large Corporates...... 19 Figure 17: Assets of Micro, Small and Medium Enterprises...... 20 Figure 18: Corporate Debt - Large Corporates...... 21 Figure 19: Corporate Debt - Micro, Small and Medium Enterprises...... 21 Figure 20: Non-Performing Loans – Corporates...... 22 Figure 21: Profit - Large Corporates...... 23 Figure 22: Profits - Micro, Small and Medium Enterprises...... 24 Figure 23: Banking Sector Assets...... 25 Figure 24: Bank Credit Growth Rate...... 27 Figure 25: Banks’ Non-performing Loans...... 28 Figure 26: Sectorial Distribution of NPLs...... 28 Figure 27: Sectoral Structure of Lending...... 29 Figure 28: Banks’ Sources of Funding...... 30 Figure 29: Structure of Deposits (in nominal terms)...... 31 Figure 30: SWIPSS Usage: 2007 - 2018...... 36 Figure 31: SAECH Cheques Volumes and Values...... 37 Figure 32: SAECH EFT Credit and Debit Volumes and Values...... 38 Figure 33: ATMs Values and Volumes 2008-2018...... 39 Figure 34: POS Values and Volumes from 2008-2018...... 39 Figure 35: Mobile Phone Money Transfers...... 40 Figure 36: Growth Rates...... 40 Figure 37: Progression of Assets in Capital Markets...... 43 Figure 38: Industry source of funds (CIS)...... 43 Figure 39: Assets as a percentage of GDP...... 44 Figure 40: Asset Composition percent...... 45 Figure 41: Funding Ratio...... 45 Figure 42: Distribution of investment income...... 46

Figure 43: Operating Cash Flow as a percentage of Assets...... 47 Figure 44: JSE All Share Index performance...... 48 Figure 45: Pension Asset Holding in E’ Billion as at December 2018...... 48 Figure 46: Government Arrears...... 49 Figure 47: Total Insurance Industry: Investment Assets, Gross Written Premium and Net Incurred Claims...... 50 Figure 48: Insurance Assets Composition percent...... 51 Figure 49: Financial Sector Assets - December 2018...... 52 Figure 50: Financial Access...... 54 Figure 51: Macro–network E’ Billions...... 57 Figure 52: Histogram of Sectors degrees...... 58 Figure 53: Hubs E’Billions...... 59 Figure 54: Authorities...... 60

TABLES

Table 1: Heat Map...... 3 Table 2: GDP Growth: Selected Economies...... 6 Table 3: Household Sector Ratios...... 18 Table 4: Corporate Debt Indicators...... 22 Table 5: Corporate Sector Profitability Indicators...... 24 Table 6: Indicators of Banking Sector Profitability After-tax...... 26 Table 7: Banks’ Credit Concentration Level...... 29 Table 8: Banks’ Funding Concentration Level...... 30 Table 9: Key Indicators of Bank Liquidity...... 31 Table 10: Summary of Stress Test Shocks and Breaking Points...... 32 Table 11: Summary of Stress Test Results for Loans Migration...... 33 Table 12: Default by the Three Largest Borrowers...... 33 Table 13: Summary of Stress Test Results for Bank Run...... 34 Table 14: Sudden Withdrawal by the Largest Depositor...... 34 Table 15: Banking Sector Rating...... 34 Table 16: SWIPSS System Flows...... 36 Table 17: SAECH Volumes and Values Cleared and Settled...... 37 Table 18: Payments Cards Usage...... 38 Table 19: Number of Commercial Bank Branches and ATMs...... 41 Table 20: Sector’s Centrality Measures on the Macro-Network...... 58 Table 21: Primary macro-economic convergence criteria for SADC...... 63 Table 22: Secondary SADC MECC...... 63 Table 23: Selected quarterly financial soundness indicators for Eswatini (percentage ratios)...64 Table 24: Commercial banks’ quarterly financial soundness indicators (percentage ratios)...... 65 Table 25: Commercial banks’ quarterly balance sheet...... 67 Table 26: Commercial banks’ quarterly income statement, year-on-year figures...... 69

LIST OF ABBREVIATIONS

AGOA - Africa Growth Opportunities Act AML - Anti Money Laundering ATM - Automated Teller Machine CAR – Capital Adequacy Ratio CMA – Common Monetary Area CSO – Central Statistics Office ECB – European Central Bank EFT – Electronic Funds Transfers EMDE – Emerging Markets and Developing Economies ENHB – Eswatini National Housing Board ERA – Eswatini Revenue Authority ESX – Eswatini Stock Exchange FinTech – Financial Technology FMI – Financial Markets Infrastructure FSR – Financial Stability Report FSRA – Financial Services Regulatory Authority GDP – Gross Domestic Product IAS – International Accounting Standards IFRS – International Financial Reporting Standards IMF – International Monetary Fund JSE – Johannesburg Stock Exchange KYC - Know Your Customer MECC – Macro Economic Convergence Criteria MEPD – Ministry of Economic Planning and Development NBFI – Non-Bank Financial Institutions POS – Point of Sale PSPF - Public Service Pensions Fund REER – Real Effective Exchange Rate RSA - Republic of South Africa SACCO – Savings and Credit Cooperatives SACU – Southern African Customs Union SADC – Southern African Development Community SAECH – Swaziland Automated Electronic Clearing House SARB – South African Reserve Bank SSA – Sub-Saharan Africa STATSSA – Statistics South Africa SWIFT – Society for Worldwide Interbank Financial Telecommunication The Fed – United States Federal Reserve Bank US – United States (of America) VAT – Value Added Tax WEO – World Economic Outlook

CHAPTER ESWATINI FINANCIAL SYSTEM 1 AND COBWEB

The trends in the risk to financial stability in the to the previous year. On the other hand, the Kingdom of Eswatini varied in each sector as risks stemming from the domestic economy and seen under Figure 1. The risks associated with household sector increased mainly due to the the NBFI, Corporate and the Banking Sectors fiscal problem in the economy that prevailed remained relatively unchanged when compared in 2018.

Figure 1: Eswatini Financial System Cobweb

DOMESTIC ECONOMY 5 4 EXTERNAL NBFI SECTOR 3 ENVIRONMENT 2 1 2017 0 PAYMENT SYSTEM 2018 HOUSEHOLD DEBT STABILITY

CORPORATE BANKING SECTOR SECTOR HEALTH

2017 2018

1.1 EXTERNAL ENVIRONMENT Protectionist policies and political tensions (EMDE), as an extension of the low interest rates in advanced and emerging market economies period in advanced economies (AE) could ease have remained elevated since the previous the pressure off capital outflows and somewhat Financial Stability Report (FSR). Policy moderate emerging market currency volatility. uncertainty (Brexit and South Africa) and trade tensions (US and China) translated to weak Growth in the Sub-Saharan Africa (SSA) region business confidence in the big economies and through 2018 was weakened by policy uncertainty contributed to weak global economic growth. in both monetary policy and political terms. The weak global productivity has resulted The interest rate risk was elevated and showed in the extension of the easy money period as an upward trajectory until the slowdown in Central Banks in advanced economies taken economic growth manifested. Public debt, stances to ease off monetary policy tightening particularly among non-resource rich countries in order to provide stimulus for their respective in the region, was a big concern for policy makers economies. This development augurs well for in 2018. These concerns remained unabated emerging markets and developing economies even in the first half of 2019. The concern that

high and unsustainable debt could lead to a 1.4 CORPORATE SECTOR depression of the region’s external position and The performance of this sector in 2018 reflected reserves was indeed realized (Eswatini) in the the slow pace of domestic and trading partners’ first half of 2019. Additionally, a noted change economic growth. Asset growth and corporate in the composition of public debt has increased profitability continued on a downward trend as vulnerabilities to sharp movements in financing observed since 2016. Corporate debt on the conditions amid strained fiscal positions. other hand recorded slight growth on a year-to- Moreover, high non-performing loans in the year basis, but depicts a downward trend since region strain the financial system while weak 2015. fiscal discipline reflects in the accumulation of large domestic arrears weighing on growth and 1.5 BANKING SECTOR financial stability. The banking sector remains stable, liquid and adequately capitalized. However, credit risk is 1.2 DOMESTIC ENVIRONMENT increasing thus affecting bank earnings, which Risks to financial stability from the domestic will ultimately affect banks solvency. This is economy largely emanated from the a result of heightened macro-economic risks fiscal sector. Government’s persisting fiscal transmitted to the banking sector through challenges manifested through increased intermediation. domestic debt, hiring and wage freeze as well as lower capital expenditure. In the past Banking sector assets grew by 4.9 percent from year, these fiscal challenges weighed heavily E19.4 billion in June 2018 to reach E20.3 billion on reserves, opening the country to tail risks, in June 2019. The asset quality, measured as external shocks and reputational risk. Ideally, a proportion of non-performing loans to total reserves should also be adequate to invoke gross loans, deteriorated from 7.7 percent to confidence in government from investors to 9.2 percent, signifying increased credit risks in boost sovereign credit ratings. Unfavorable 2019. On the other hand, deposits experienced credit ratings increase the cost of borrowing a 2.8 percent growth to reach E15.3 billion in from international markets, which could push the year ending June 2019 and remained the up debt servicing costs of existing loans. Despite main source of funding. Banks’ overall liquidity a slowdown in inflation, the wage freeze for the rose from 30.3 percent to 32.8 percent in June civil service (including parastatal employees) 2019. Profitability improved in the year to June and stagnant income for private sector elevated 2019. The average return on assets (ROA) and credit risk and risks to asset quality for financial return on total equity (ROE) increased from 2.0 institutions from sectors highly exposed to the percent and 13.7 percent to 2.6 percent and government sector. 16.6 percent respectively.

1.3 HOUSEHOLD SECTOR Overall, risks increased when compared to the The household sector continued to feel the previous year. However, the implementation of gravity of Government’s fiscal challenges. In restrictive tools like Basel II and IFRS9 is likely 2018, there was a recorded uptick in household to improve banks resilience to risks. The sector indebtedness raising risks to financial stability. is expected to grow in the near future as the The strain on household disposable income was country’s economy is projected to grow. reflected in higher levels of non-performing loans from this sector. Household disposable income 1.6 NON-BANK FINANCIAL SECTOR is expected to remain strained due to higher Overall risk trend from the Non-Bank Financial utility prices resulting from VAT administered on Institutions (NBFIs) remain unchanged when electricity. Moreover, personal income tax rates compared to the previous year. The NBFIs sector are expected to rise further eroding disposable assets grew by 5 percent year on year. The income. Households could be forced to re- growth is lower than 11 percent year on year allocate disposable income between lowered growth observed in 2017. The slower growth consumption and debt service. was mainly driven by slower growth in Capital

market sector assets (CIS and ESX), Insurance; Non-bank financial institutions have a major owing to volatility and poor financial markets asset share of 49.8 percent collectively performance during the year under review. (pension funds, insurance, unit trust schemes and SACCOs) in the financial system. The largest The main risk in the pension and retirement source of funds is the institutional pension funds sector is concentration risk. The industry which constitutes 40.0 percent of the market has two main players with combined assets share. It has the potential of causing liquidity totalling E25.6 billion, representing 81.6 constraints in the financial system. percent of the assets of the industry and 64.8 percent of gross domestic product (GDP).Any 1.7 PAYMENTS SYSTEMS STABILITY failure of either of the two institutions will The National Payment system maintained high therefore have an adverse impact in the entire system availability during 2018 with moderate economy. This is so because, the pension fund risk to financial stability. The SWIPPS and sector is interconnected with financial system SWIFT historical average availability ratio was and the real economy through high investments 95.6 percent and 88.5 percent respectively. and issuance of loans to corporates as well as debt and equity.

1.8 HEAT MAP household debt, corporate sector health, This section presents a brief analysis of the banking system, national payment system and main risks to financial stability of the Kingdom NBFIs. The risks are rated from low to high, of Eswatini. The heat map is forward looking based on their probability of occurrence as and identifies the risks arising from the external well as their potential impact on the financial economic environment, domestic economy, stability if they are realized.

Table 1: Heat Map

Risk Composite Risk Source Probability Impact Weight Rating EXTERNAL ENVIRONMENT Trading partners growth decelerates 0.3 Moderate Moderate Moderate Interest rates increase 0.2 Low Low Low Terms of trade deteriorate 0.2 Moderate Moderate Moderate 12-month standard deviation REER increases 0.3 Moderate Moderate Moderate Moderate DOMESTIC ECONOMY GDP growth (%) further stagnates 0.2 Moderate High High Fiscal Deficit (%GDP) widens 0.2 High High High Discount Rate increase 0.1 Low Moderate Moderate CPI Inflation remains high 0.2 Low Moderate Moderate SACU Revenue (%GDP) Declines 0.3 High High High High HOUSEHOLD DEBT Household debt % disposable income increases 0.5 High High High Household debt service deteriorates 0.5 High High High High CORPORATE SECTOR HEALTH Debt to equity increase 0.35 Moderate Moderate Moderate ROE decreases 0.3 High Moderate High Interest cover decreases 0.35 High Moderate High High BANKING SECTOR Capital adequacy decreases 0.2 Low Moderate Moderate Asset quality deteriorates 0.3 Moderate High High Earnings decline 0.2 Low Low Low Liquidity dries up 0.3 Low Low Low Moderate NATIONAL PAYMENT SYSTEM SWIPPS availability ratio decreases 0.5 Low Moderate Moderate SAECH availability decreases 0.5 Low Moderate Moderate Moderate NON-BANK FINANCIAL INSTITUTIONS (NBFIs) Savings and credit NPLs increases 0.1 Moderate Moderate Moderate Pension and Retirement funds Funding status decreases 0.4 Moderate High High Capital Markets liquidity decreases 0.3 Moderate High High Insurance Loss ratio increases 0.2 Low Low Low Moderate Key

Low risk High risk

CHAPTER EXTERNAL ECONOMIC 2 DEVELOPMENTS

2.1 GLOBAL AND REGIONAL ECONOMIC household consumption and elevate the risk of DEVELOPMENTS a temporary recession. The Bank of Japan (BoJ) Global growth is estimated at 3.6 percent continues to provide stimulus by keeping long- in 2018 and expected to slow down to 3.2 term rates near zero and adding government percent in 2019 but pick up to 3.5 percent in debt to its balance sheet. 2020 (World Economic Outlook Update, July 2019). Negative spill-overs as protectionist Growth in the Euro Area has been challenged policies manifested and continued to weigh by weak private consumption, weak industrial negatively on global economic growth in the past production and subdued foreign and domestic year, with their effects are expected to linger demand. Additionally, higher borrowing costs into 2020. Technology supply chains continue to due to elevated sovereign yields and negative be threatened by uncertainty around prospects impact of industrial action particularly in of sanctions imposed by the United States (US), Germany, France and Italy have weighed Brexit and geopolitical tensions that riled oil negatively on overall Euro Area growth. prices particularly in the first half of 2019. Consequently, economic growth in the Euro Area These tensions fuel downside risks to global is expected to moderate to 1.3 percent in 2019 economic outlook as they depress sentiment from 1.9 percent in 2018 before picking up to 1.6 and investment; perpetuate risk aversion that percent in 2020. The Brexit outcome remains a expose financial vulnerabilities during episodes highly destabilising factor and continues to feed of more favourable credit conditions, and into financial market uncertainty and sustained constrain the ability of monetary policy to conservative projections for Euro Area growth. counter economic downturns due to mounting Despite having been no structural changes to downward inflationary pressures. the UK – EU trading relationship, the economic consequences are already becoming apparent. Growth in the US is expected to slow to 2.6 As the possibility of an orderly uncoupling from percent in 2019 from 2.9 percent in 2018. In the EU becomes less likely with each passing 2020, growth in the US is forecast to moderate month, the potential economic impact seems further to 1.9 percent as the fiscal stimulus likely to be worse than previous estimates due unwinds. US domestic demand has recently to the ongoing uncertainty and political disarray. been softer as reflected by weak imports in the Even though contingency plans are most likely first half of 2019 against a backdrop of trade in place in countries that have significant trade tensions. with the UK, a disorderly separation would still present an adverse shock. Taking into Japan’s growth slowed to 0.8 percent in 2018 consideration the high level of uncertainty, UK and is anticipated to pick up marginally to forecasts for 2019 stood at a tepid 1.3 percent, 0.9 percent in 2019 reflecting a recovery improving slightly to 1.4 percent in 2020. from temporary disruptions in 2018 by bad weather and natural disasters. Japan’s growth Growth in emerging markets and developing is projected to slow to 0.4 percent growth in economies (EMDE) is expected to slow down to 2020 due to an expected increase on national a still strong 4.1 percent growth in 2019 from sales taxes later in 2019. On the back of a 4.5 percent in 2018 before picking up to 4.7 slowdown in global growth, a winding down of percent in 2020. Bilateral tariffs imposed by looser policies and a shrinking population, the the US and China are slowing growth through increase in consumption taxes could depress trade and investments. Escalating tariffs and

weak external demand have increased pressure amidst a structural slowdown and regulatory on the Chinese economy. Policy stimulus strengthening targeted at reigning in high is expected to support the external shocks dependence on debt in the Chinese economy.

Table 2: GDP Growth: Selected Economies

2017 2018 2019 2020 GLOBAL 3.8 3.6 3.2 3.5 ADVANCED ECONOMIES 2.4 2.2 1.9 1.7 USA 2.2 2.9 2.6 1.9 EURO AREA 2.4 1.9 1.3 1.6 UNITED KINGDOM 1.8 1.4 1.3 1.4 JAPAN 1.9 0.8 0.9 0.4 EMDE 4.8 4.5 4.1 4.7 CHINA 6.8 6.6 6.2 6.0 SSA 2.9 3.1 3.4 3.6 RSA* 1.4 0.8 0.6 1.8 Source: World Economic Outlook, July 2019. *South African Reserve Bank

Sub Saharan Africa (SSA) is expected to grow In 2020, reduced policy uncertainty and by 3.4 percent in 2019 and pick up momentum improved investment in the large economies to 3.6 percent in 2020. Growth in this region coupled with robust economic growth in the is expected to be largely supported by the non-resource rich countries is expected to boost resource rich Nigeria and Angola. the region’s growth. Growth support from non- resource rich countries is expected to emanate Moderation in global trade growth, tightening of from an improvement in public investment and financing conditions and strengthening of the US robust agricultural output. Trade tensions and Dollar weighed down the region’s performance slower-than-projected growth in trading partner in 2018. countries (particularly China and the Euro Area) are additional risk points that dampen the Public debt in the SSA region remains elevated, regions’ growth outlook. Furthermore, even particularly among non-resource rich countries though the risk from faster than expected due to their reliance on public investment monetary policy normalization has moderated to boost their respective economies. Public somewhat in the near to medium term, the risk balance sheets depress the region’s external remains. position and respective reserves. Government debt-to-GDP ratios are estimated to have 2.2 GLOBAL FINANCIAL STABILITY increased to above 60 percent in a third of the DEVELOPMENTS countries in the SSA (World Economic Outlook, A stable global financial system is the 2019). Contributing to the worsening of public cornerstone of sustained economic growth. debt-to-GDP ratios, as noted in the WEO, Economic interconnectedness makes the are depreciations (e.g. Zambia), contracting financial system vulnerable to shocks from economies (e.g. Equatorial Guinea, Republic the real sector. The International Monetary of Congo) and the reconciling of previously Fund (IMF) asserts that financial stability unreported debt (e.g. Mozambique, Republic of conditions tautened but remained relatively Congo). accommodative. (Global Financial Stability

Report, April 2019). Risks emanating from 0.8 percent in 2018 down from 1.4 percent a sharper than expected economic growth recorded in 2017. The 2.6 percent and 1.4 slowdown, an unexpected monetary policy percent growth of the third and fourth quarter tightening by advanced economies, and fiscal respectively provided an overall boost to annual policy and political risks could lead to sudden economic growth. In the first quarter of 2019, amplification of existing risks to financial the SA economy contracted by 3.2 percent as stability. Economies with weak fundamentals, spill over effects from strike activity and the high financial vulnerabilities and over extended severe electricity load shedding in February and policies that could impair their response to March 2019 took effect. The energy shortages shocks from sharper than expected monetary manifested adversely in the manufacturing, policy tightening are at high risk. mining and agricultural sectors. Consequently, expectations regarding the pace of economic The IMF’s 2019 Global Financial Stability Report growth for 2019 have lowered from 1 percent to (GFSR) notes that corporate sector debt in 0.6 percent (SARB, 2019). Moreover, SA remains advanced economies is more manageable vulnerable to domestic and external risks (IMF as corporates’ debt servicing capacity has GFSR, July 2019). improved in the past year. Corporates’ balance sheets reflect they will most likely withstand The low economic growth rates in RSA could shocks from expected moderate economic perpetuate unemployment, reduce debt service downturns. However, risks from monetary capacity, heighten socio-economic restlessness policy normalization remain, which could and exacerbate Rand volatility. Externally, challenge servicing the elevated debt burdens the global economic slowdown, uncertainty for corporates and households even if interest over Brexit and its potential implications, rates remain lower for longer than previously and lingering trade tensions could weigh on anticipated. economic productivity through the trade and investment channels. Additionally, persistently Policy makers are encouraged to clearly rising oil prices exerted upward pressure communicate any reassessment of the on fuel led inflation in the past year and the monetary policy stance, deploy or expand outlook for the near term remains the same their macroprudential toolkits, prudently as fuel prices increased again in June 2019. manage public and private balance sheets and Domestic risks stem from continued policy step up efforts to ensure resilience against uncertainty regarding land expropriation, the foreign portfolio outflows (IMF GFSR, April mandate of the South African Reserve Bank 2019). These efforts by policy makers could and high unemployment that perpetuate ensure adequate support for demand, prevent socio-economic stability needed for effective downside risks from materializing and enhance policymaking. All these factors reflect in weak resilience. Additionally, enhanced dialogue business confidence and weigh negatively on and reinforcement of global rules-based the country’s sovereign credit rating, which international trade could halt, or at least, could further pressurize the primary balance reduce trade policy related uncertainties. due to higher debt servicing costs. There is scope for closer supervision of non- bank financial institutions (NBFI) and macro- 2.3.2 Financial Stability prudential measures for highly leveraged Financial Stability in SA is vital for the stability borrowers, which could help minimize the of the financial system of the Common Monetary build-up of financial vulnerabilities. Area (CMA) countries. Eswatini’s banking industry is relatively small with three of its 2.3 SOUTH AFRICA four commercial banks headquartered in SA. Financial Stability risks in SA largely stem from 2.3.1 Economic developments a deteriorating domestic fiscal position, weaker South Africa’s (SA) short-lived technical global economic growth spillovers, tightening of recession in the first two quarters of 2018 led global financial conditions affecting emerging to a modest annual economic growth rate of markets as well as rising cyber dependency and

security risks (SARB Financial Stability Review, Households, a highly vulnerable sector in any May 2019). Other emerging risks identified in economy, often absorb much of the impact the last six months of 2018 emanate from the should economic headwinds be experienced. banking sector, insurance and pensions sector, The household sector is a significant driver of domestic financial markets, non-financial the SA economy through consumption and is corporate sector and the household sector. of particular importance to financial stability In the SA banking sector, credit risk has been as it provides a wide clientele base for banks. increasing in loan books while profitability is Household balance sheets have weakened in declining in smaller banks. From the insurance the past year. Growth in disposable income and pension sectors, there is a high level of decelerated indicating lowered take-home pay. concentration and an increase in the risk of The outlook on the household balance sheet natural disasters and climate-related claims is subdued but positive as disposable income have been an observed. The risk of market growth outpaced inflation (SARB Financial expectations diverging from the US Federal Stability Review, May 2019). However, slowing Reserve’s (Fed) stance and a sovereign ratings economic growth prospects are expected to downgrade for SA remains elevated and will weigh negatively on households’ future earnings likely impact on domestic financial markets, impairing debt servicing ability and banks’ asset debt levels and already declining profits in both quality. financial and non-financial institutions.

CHAPTER 3 DOMESTIC ECONOMY

3.1 ECONOMIC GROWTH Eswatini’s economy grew by 2.4 percent In the near term, economic activity is projected in 2018 following growth of 2.0 percent to grow by 1.4 percent, slowing down from recorded in 2017 (figure 2). The primary the estimated growth of 2.4 percent recorded sector, estimated to have grown by 7.4 percent in 2018. The downside risks to growth stem in 2018, led overall economic growth. The from the ongoing fiscal challenges, which have primary sector’s strong performance was largely affected major sectors. Additionally, the hiring due to significant increase in production (sugar and wage-freeze effects are partly reflected cane, maize and cotton production as well in low output from the wholesale and retail as as forestry output) resulting from favourable well as activities from the public administration weather conditions. The tertiary sector grew by and social security subsectors due to strained 3.1 percent in 2018 from 2.9 percent in 2017. household disposable income. The downside The tertiary sector was predominantly driven by risks to near term outlook however, are the financial and insurance services subsector, counteracted by an expected rebound in the which recorded growth of 12.2 percent in 2018. manufacturing sector, which will be boosted This sub-sector partially benefited from stronger by stronger performance in trading partners’ growth in the subsectors of agriculture, forestry economies and the exploration of new markets. and agro-processing as well as continuous Economic activity in the medium term (2020) technological advancement in the provision of is projected to pick up to 2.9 percent resulting financial services (MEPD, 2019). from sustained positive performance in the secondary sector. Additionally, government’s Unlike growth reflected in the primary and efforts towards eradicating arrears is expected tertiary sectors, growth in the secondary to augur well for some sectors such as the sector in 2018 contracted by 0.4 percent. construction subsector. However, this uptick Weak performance from the manufacturing of in economic growth will not be sustained in beverages and other non-food manufacturing the absence of stronger fiscal consolidation subsectors was the main driver for the overall measures and structural reforms (MEPD, 2019). performance of the secondary sector. The The lack of sustainability refreshes the risk construction sub-sector also recorded a decline of debt accumulation, which will prolong the of 0.3 percent in 2018 partly reflecting the current fiscal challenges and dampen future effects of the ongoing fiscal challenges that growth prospects. This is a consideration that resulted in the scaling down of some mega- can be observed in lowered economic growth public sector infrastructural projects. projected for 2021 and 2022 as seen in figure 2.

Figure 2: GDP Growth

10.00

8.00

6.00

4.00 2.9 2.00 2.3 2.0 2.4 1.3 1.7 1.3 1.4 -

(2.00) Percent (4.00)

(6.00)

(8.00)

(10.00) 2015e 2016e 2017e 2018e 2019F 2020F 2021F 2022F Primary Sector Secondary Sector Tertiary Sector Overall

Source: Ministry for Economic Planning and Development e- Estimate. F- Forecast

3.2 INFLATION AND INTEREST RATES Additionally, lower rental and utility prices, Eswatini’s rate of inflation remained within which carry significant weight in the consumer the Southern African Development Community inflation basket, are also likely to contribute to (SADC) Macro-Economic Convergence Criteria lower inflation expectations due to the tariff (MECC) targets over the past year (figure 3). hike freeze imposed by government. These Throughout 2018, inflation was largely utility factors are expected to alleviate pressure on price driven as the price of fuel, rent and other households’ disposable income. household utilities increased. Rising inflation could incentivize households to pursue riskier Indeed, annual average inflation fell to 4.3 credit avenues to keep pace with increasing percent in June 2019 from an average of 5.1 living expenses. Growth in non-regulated credit percent in June 2018. Base effects from 2018 lending undermines financial inclusion efforts, in the price indices for ‘electricity’ and ‘rentals reduces liquidity in the banking system and for housing (Recent Economic Developments, reduces the effectiveness of monetary policy April/May 2019) were the main drivers of the implementation. Moreover, the high interest slowdown in the 12-month average inflation. charged by informal micro-lenders makes However, upside risks remain due to the VAT on households worse off as they may be stuck in electricity, which could offset gains from lower a perpetual cycle of high repayments and debt utility prices. Moreover, the utility tariff freeze service costs, thereby depriving them of the is not expected to be a permanent situation. relief of accommodative monetary policy. The Central Bank of Eswatini (CBE) expects inflation to average 5.24 percent in the quarter Despite stable inflationary movements, risks ending June 2020 and moderate to an annual to inflation in the medium term are tilted to average of 4.54 percent for 2019 before picking the downside driven by expected lower food up to an average of 5.8 percent in 2020. prices due to improved weather conditions.

Figure 3: Inflation

9.0 8.0 7.0

6.0 5.0 4.0 Percent 3.0 2.0 1.0 0.0

Inflation SADC MECC Lower target SADC MECC Upper Target

Source: Central Bank of Eswatini Shown in the graph is 12-month average (June-to-June) inflation F-forecast

The CBE maintained the benchmark rate 2016 is in full effect. at relatively low levels compared to the preceding year. Since January 2018, the The accommodative interest rates and policy rate declined by a cumulative 50 basis regulatory developments may encourage points against a background of a challenging credit extension and provide some relief to fiscal position, low economic productivity and leveraged sectors. Moreover, the low interest low consumption due to strained household rate environment does not present risk to finances. Most recently, the CBE cut the discount profitability of banks in the medium term rate by 25 basis points to 6.5 percent in July despite presenting an opportunity for banks 2019. The CBE also issued Legal Notice 47 of to re-assess the sustainability of their long- 2019 effective 1 April 2019, which prohibits term business models. The banks continue to banks from imposing upward adjustments on display resilience against domestic economic tariffs for a period of 18 months. Legal Notice challenges, which demonstrates their strong 47 comes at a time when Legal Notice 62 of interest rate risk mitigation strategies.

Figure 4: Policy Rates and Prime Lending Rates

12.00 11.00 10.00 9.00 8.00

Percent 7.00 6.00 5.00 4.00 Jul-18 Jul-17 Jul-16 Jul-15 Jul-14 Jul-19 Apr-19 Apr-18 Apr-17 Apr-16 Apr-15 Apr-14 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Oct-18 Oct-17 Oct-16 Oct-15 Oct-14

Discount Rate - Eswatini Repo Rate - RSA Prime Lending Rate - Eswatini Prime Lending Rate - RSA

Source: Central Bank of Eswatini

3.3 FISCAL POSITION Government’s fiscal position remains grow to E18.9 billion in 2019/20. Government under pressure partly due to tight plans to boost revenue through implementation revenue inflows and weak economic of various measures that will generate performance. Government revenue approximately E900 million of revenue in the is estimated to reach E16.2 billion at next financial year. the end of 2018/19 and budgeted to

Figure 5: Government Revenue Components Figure 6: Government Revenue & Government Expenditure Components/Total Revenue Ratio Figure 6 : Government Revenue Components/Total Revenue Ratio 25,000 60.00 60.00

20,000 50.00 50.00 Figure 6 : Government Revenue Components/Total Revenue Ratio

15,000 40.00 40.0060.00

50.00

E'Million % 10,000 30.00 30.00 % 40.00

5,000 20.00 20.0030.00 %

20.00 10.00 10.00 0 10.00

- - 2013 2014 2015 2016 2017 2018 2019 2020 2021 /14 /15 /16 /17 /18 /19* /20** /21^ /22^ Other Tax (LHS) 17.80/14 17.72/15 20.18/16 22.79/17 22.15/18 25.49/19* 24.82/20** 26.73/21^ 27.45/22^ OtherSACU RecieptsTax (LHS) (LHS) 17.8054.68 17.7250.92 20.1847.98 22.7936.28 22.1542.66 25.4935.97 24.8233.50 26.7333.80 27.4532.46 Non Tax Revenue (LHS) 2.51 1.98 3.11 4.65 2.80 4.04 3.53 3.61 3.52 Total Government Revenue SACUIncome Reciepts Taxes (RHS)(LHS) 54.6823.51 50.9224.10 47.9826.45 36.2832.84 42.6629.17 35.9731.70 33.5030.46 33.8032.86 32.4633.63 NonGrants Tax (RHS) Revenue (LHS) 2.511.50 1.985.28 3.112.28 4.653.45 2.803.22 4.042.80 3.532.92 3.613.00 3.522.94

Total Government Expenditure Income Taxes (RHS) 23.51 24.10 26.45 32.84 29.17 31.70 30.46 32.86 33.63 Grants (RHS) 1.50 5.28 2.28 3.45 3.22 2.80 2.92 3.00 2.94 Source: Ministry of Finance. **Budget. ^Projection Source: Ministry of Finance. **Budget. ^Projection

Over the years, the country’s customs receipts (excluding customs receipts) is estimated to from the Southern African Customs Union (SACU) make up 24.8 percent of total revenue. have been declining due to various challenges faced by trading partners including changing Government’s main strategy to diversify and geopolitical landscapes and global warming improve revenue strongly hinges on domestic factors. Other taxes on the other hand have mobilization via taxation including personal been steadily growing (figure 5). Government income taxes (from 33 percent to 36 percent), revenue remains concentrated on SACU, and VAT on electricity as well as other user taxes. by extension reliant on, SACU customs receipt, As a result, household income will experience although the contribution has decreased over added downward pressure against a backdrop the last few years (figure 6). In 2019/20, SACU of low real income growth. Households will be receipts will make up an estimated 33.5 percent obligated to re-evaluate consumption choices of total government revenue, lower than the 36 and re-allocate income to ensure that they percent share recorded in the previous financial keep up with debt obligations. year. Income taxes, which consists of personal income taxes, company tax, graded tax and Corporates on the other hand may feel some other income tax, are expected to make up relief in the medium term as government 30.5 percent of government’s total revenue has budgeted to reduce corporate tax by a in 2019/20 while taxes on goods and services cumulative 15 percentage points from 2020 to

20231 . By reducing corporate tax, government’s improvement from 5.5 percent ratio recorded objective is to attract foreign direct investment in 2018/19. Government plans to continue with (FDI), encourage operating firms to retain fiscal consolidation measures while increasing current employees, encourage micro, small and diversifying revenue sources. As can be and medium enterprises (MSME) economic seen in figure 7, Eswatini’s fiscal position/GDP participation and promote a private sector ratio is still higher than the target of 3 percent driven economy. agreed by members of the Southern African Development Community (SADC) for Macro- Eswatini’s fiscal deficit is expected to Economic Convergence Criteria (MECC) (see close at E2.98 billion in 2019/20, which is Box A in the Appendix). approximately 4.5 percent of GDP reflecting an

Figure 7: Fiscal Position/GDP Ratio and government expenditure Figure 7: Fiscal Position/GDP Ratio and government expenditure

3.33

0.46

-1.12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

-3 -3 -3 -3 -3 -3 -32018/19* -3 -3 -3 2020/21^ 2021/22^ 2019/20** -3.83 -4.64 -4.52 -4.38 -5.12 -5.46

-7.07

Surplus/Deficit as % of GDP SADC MECC Target

Source: Ministry Ministry of Finance. of Finance. *Budget *Budget preliminary preliminary estimate. **Budget. estimate. ^Projection **Budget. ^Projection

3.4 GOVERNMENT DEBT Risks to financial stability emanating from public debt. External debt on the other hand government debt remained elevated in 2018. amounted to E7 billion at the end of June 2019 Both domestic and external public debt from E6 billion recorded in June 2018. Factors continued on an upward trajectory in 2018 driving public debt growth over the year (figure 8). As at June 2019, total public debt include drawdowns made on disbursing project stood at E18.3 billion from E13.7 billion recorded loans, weakening of the Lilangeni against major in June 2018. Domestic debt, which amounted trading currencies, private placements and to E11.3 billion, made up 61.8 percent of total continued issuance of government securities.

1See http://www.gov.sz/images/CabinetMinisters/STRATEGIC-ROADMAP-2018-2023---MAY-2019.pdf

Figure 8: Government Debt and government securities outstanding

18.00 7.00 16.00 6.00 14.00 5.00 12.00

10.00 4.00

8.00 E'Billion 3.00 E'Billion

6.00 2.00 4.00 1.00 2.00 0.00 0.00 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Dec-18 Dec-14 Dec-15 Dec-16 Dec-17 Government Bond Outstanding Domestic Debt External Debt Treasury Bills Outstanding Total Debt

Source: Central Bank of Eswatini

Over the years, security holdings by NBFI have higher than the 57.8 percent proportion held a gained momentum (figure 9). NBFI security year ago. The proportion of commercial banks’ holdings account for over 50 percent of holdings fell to 30.2 percent from 35.3 percent government security holdings. As at June 2019, recorded in June 2019. NBFI held 58.5 percent of government securities,

Figure 9: Composition of Government Debt by Holder

Proportion (%) Proportion 20

CBE BANKS NBFI OTHER

Source: Central Bank of Eswatini

Total public debt to GDP continues to grow as it External debt to GDP also recorded growth of can be seen on figure 10. As at June 2019, total 1.4 percentage points to a ratio of 10.6 percent public debt to GDP ratio stood at 27.8 percent, at the end of June 2019. Despite the upward higher than the 19.5 percent ratio recorded in tendency of the public debt to GDP ratios, they June 2018. Domestic debt to GDP ratio closed remain within the benchmark critical ratios for at 17.2 percent, reflecting growth of 6.9 low-income countries2. percentage points from the preceding year.

Figure 10: Debt-to-GDP Ratio

15 Domestic Debt/GDP Foreign Debt/GDP Per cent Per 10 Total Debt/GDP 5

0 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Mar-16 Mar-17 Mar-18 Mar-15 Mar-19 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Source: Central Bank of Eswatini

As it can be seen on figure 10, Eswatini’s weakens a central bank’s capacity to supply external public debt moderately trends liquidity in the event of a banking crisis. Low upwards, increasing the country’s exposure GOR could also compromise the credibility of to sudden changes in borrowing costs. Government as recipient of FDI. It could also Strengthening domestic resource mobilization, lead to unexpected shocks and low sovereign cutting current expenditure and managing debt credit ratings, which could result in higher however, moderates the medium term outlook borrowing costs from external markets. on Eswatini’s growth rate of public debt. In May 2019, Moody’s Rating Agency issued a 3.5 GROSS OFFICIAL RESERVES warning about a possible downward revision on Drawdowns of Eswatini’s Gross Official Eswatini’s sovereign debt based on the low GOR Reserves (GOR) outpaced the pace at which pool and the speed of GOR drawdowns. Moody’s they were replenished throughout the year asserts that low reserves currently raise tail risks ended June 2018. As at June 2019, GOR stood and could have significant credit implications at E5.1 billion, 16 percent lower than recorded if it were to disrupt economic activity through in the preceding year. Consequently, import foreign exchange shortages and financial cover fell to 2.3 months in June 2019 from 2.9 stability through pressures on the currency peg months observed in June 2018. The contraction with the Rand. Moody’s did however, note that in GOR was largely due to payments of Eswatini’s favourable debt maturity structure government’s obligations throughout the year bodes well for debt repayments as the reserves against a background of lower revenue inflows are enough to cover debt maturing in the next and weak economic performance. Low GOR 12 to 18 months.

2Central Bank of Eswatini Quarterly Report. December 2018. Public External Debt Stock to GDP (30-50%). Public Domestic Debt Stock to GDP (20-25%).

Figure 11: Gross Official Reserves (12-month moving average)

8,500.0 4.5 8,000.0 4.0 7,500.0

7,000.0 3.5 6,500.0 3.0 6,000.0 Months E'Million 5,500.0 2.5 5,000.0 2.0 4,500.0 4,000.0 1.5 June June June June June June March March March March March December December December December December September September September September September 2014 2015 2016 2017 2018 2019 GOR (E'Million) [12m MA] Import Cover in Months (RHS)

International Benhcmark (3 Months.RHS)

Source: Central Bank of Eswatini

3.6 HOUSEHOLD SECTOR recorded in the previous year. Mortgage loans Credit exposure of commercial banks to still account for a high proportion of total bank households remained elevated in 2018, albeit at credit to households, contributing 46 percent. a marginally lower level compared to 2017. At Mortgages are a relatively safer type of loan the end of 2018 total bank credit to households as the property is used as collateral. Motor stood at E4.5 billion, a decrease from E4.6 billion vehicle finance decreased from E1.2 billion in observed at the end of 2017. As a percentage December 2017 to E784 million in December of total bank credit extended to the private 2018 (figure 12). Unsecured personal loans on sector in 2018, households received a share of the other hand reflected a marginal change of 38.4 percent, a decrease from 41.8 percent 4.8 percent.

Figure 12: Household Loan Portfolio – Commercial Banks

6,000,000

5,000,000

4,000,000

3,000,000 E 'Million E 2,000,000

1,000,000

- Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018

Housing Motor Vehicles Other(unsecured) Total

Source: Central Bank of Eswatini

In the NBFI subsector, Credit Financial increased marginally from 45.8 percent in 2017 Institutions (CFI) and Savings and Credit Co- to 49.6 percent in 2018 (figure 13). The ease operatives (SACCOs) contribute a significant with which credit can be obtained from this portion of credit to households. The share of sector has been a significant driver of its growth loans by CFI and SACCO to the household sector in household credit.

Figure 13: Household Loans by Type

50.3% 51.9% 55.4% 54.2% 50.4% 49.7% 49.6% 48.1% 45.8% 44.6%

Percentage

2014 2015 2016 2017 2018

Credit To Individuals/Households (Banks) Credit To Individuals/Households (Non-Banks)

Source: Central Bank of Eswatini, Micro Finance Institutions and Department of Cooperative Development

Highly indebted households are particularly the public sector and stagnant income in the vulnerable to monetary policy tightening and private sector. Risks to household indebtedness inflation. A high level of debt could lead to in the medium term are tilted to the upside either a re-allocation of income to decrease due to proposed increase in income tax, user consumption in order to service debt, or default fees and VAT on electricity. These factors might on debt to keep up with consumption needs. In outweigh some of the attempted relief efforts 2018, household indebtedness was recorded at by policymakers to suspend bank charges 128.9 percent, higher than the 113.9 percent increase and by maintaining a low interest rate recorded in 2017 (figure 14). This increase environment. was exacerbated by zero income growth in

Figure 14: Household Indebtedness

2018

2017

2016

2015

2014

2013

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0%

Source: Central Bank of Eswatini, Eswatini Revenue Authority, Micro Finance Unit

In the year ending 2018, overdue loans from interest) closed at E162.5 million at the end of households grew by 90.4 percent to E461.1 2018 from E170.27 million observed at the end million. Figure 15 reflects an uptrend in of 2017. The effects of the worsening economic household overdue loans. Loss loans (suspended environment on household are expected to interest) on the other hand are growing at a continue to manifest in the upcoming months slower pace despite a year on year contraction as disposable income is expected to remain of 4 percent in 2018. Loss loans (suspended relatively stagnant.

Figure 15: Household Overdue and Non-Performing Loans

500

400

300

200 E' Million 100

0 2013 2014 2015 2016 2017 2018

Overdue loans (still accruing interest) Loss loans (suspended interest)

Source: Central Bank of Eswatini. Includes Building Society

The disposable income-to-GDP ratio decreased inflation outlook driven by increasing energy from 18.4 percent in 2017 to 17.8 percent in prices. Consequently, households’ propensity to 2018 (table 3), reflecting weakened purchasing save and invest could be reduced as they aim to power in the review year. Risks to disposable balance their balance sheets for consumption income have increased in 2019 due to the purposes. pending increases in taxes and the risks to the

Table 3: Household Sector Ratios

2013 2014 2015 2016 2017 2018 Disposable income to GDP (%) 9.0 17.6 12.7 11.8 18.4 17.8 Household Credit/GDP (%) 10.1 14.6 13.6 15.7 20.9 22.9 *Due to data limitations, figures for 2018 are subject to revision Source: Central Bank of Eswatini, Eswatini Revenue Authority

3.7 CORPORATE SECTOR The assets of the corporate sector as a whole the total corporate sector. As a result, a decline continued to decline during the year under in this sector greatly affects the corporate review, shrinking by 8.1 percent in 2018 and thus sector as a whole. The decrease in assets adding to the 2 percent decline observed in the indicates that companies are disinvesting due to previous year. Total corporate assets declined prevailing challenges. Delayed payments from to E44.0 billion in 2018 from E47.9 billion in the government in the review period resulted 2017. At the end of 2018, large corporates’ in interruptions in some of the public sector assets declined by 20 percent, amounting to projects whose implementation was carried out E26.8 billion, down from the E33.4 billion in by service providers in the corporate sector. 2017. Large corporates make up 61 percent of Consequently, some companies – particularly

those that mainly have public sector projects on challenges. MSMEs3 on the other hand increased their loan book – reported cash-flow challenges by 19.8 percent from E14.5 billion at the end of and attributed them to government’s fiscal 2017 to E17.2 billion at the end of 2018.

Box 1: Defining MSME’s in Eswatini

Category Employees Value of Assets Turn-Over Micro-Enterprise 0-10 Under E50,000 Up to E60,000 Small-Enterprise 11-20 Over E50,000 to E2 million Up to E3 million Medium-Enterprise 21-60 Over E2 million to E5 million Up to E8 million Source: Eswatini SMME policy

3.7.1 Large Corporates from government. Companies have not received Corporates in the three largest tax sectors payment for work done, in turn affecting their by asset size recorded declines in the period cash flow as well as slowing down investment and under review. The largest decline in assets was project completion. Assets held by corporates observed in the construction sector which fell in other sectors also contracted in the review by 44.9 percent to E1.2 billion in 2018 (figure year, specifically in the wholesale sector (-23.6 16) from E2.1 billion in 2017. Some of the percent), manufacturing sector (-15.2 percent) challenges faced by the construction sector and the agriculture and forestry sector (-11.7 has to do with the process of claiming payment percent).

Figure 16: Assets - Large Corporates

20,000 18,00020,000

16,00018,000 14,000

16,000 12,00014,000 10,00012,000 10,000 8,000 E'Millions 8,0006,000

E'Millions 6,0004,000 4,0002,000 2,000 - - activities Activities and fishing Construction Manufacturing, communication Information and and food service and other industrial Wholesale and retail Agriculture, forestry Real estate activities trade, transportation transportation trade, mining and quarrying

2015 2016 2017 2018 accommodation storage,

2015 2016 2017 2018

Source: Eswatini Revenue Authority

3See box 1 for definition of MSME in Eswatini

3.7.2 Micro, Small and Medium Enterprises For corporates classified as MSMEs, the three sector improved to E2.0 billion in 2018 from largest sectors classified by asset size are the E1.8 billion in 2017 (figure 17). real estate, wholesale and the agricultural sectors respectively. MSMEs operating in the One of the processes negatively impacting real estate sector recorded assets amounting the property buying process in Eswatini is the to E5.1 billion at the end of 2018, reflecting valuation process. While property may be an increase of 24.3 percent year on year. The valued at a certain amount by valuators, this wholesale and retail trade, transportation may not reflect the true market price of similar and storage, accommodation and food service properties in the market. The lack of regulation sector recorded asset growth of 19.0 percent in the real estate sector creates some pricing during 2018 to close the year at E4.4 billion, inconsistencies in the housing market and the up from the E3.8 billion recorded in 2017. The absence of a house price index makes it difficult assets of the agriculture, forestry and fishing to determine the real value of real estate.

Figure 17: Assets of Micro, Small and Medium Enterprises

6,000

5,000 5,000 4,000 4,000

E'Millions 3,000

E'Millions 3,000 2,000 2,000 1,000 1,000 - - activities Activities and fishing Construction work activities other industrial and quarrying and support service Wholesale and retail Agriculture, forestry Real astate activities trade, transportation transportation trade, Public administration Public administration Manufacturing, mining Other service activities Professional, scientific, storage, accommodation storage, human health and social and defence, education, technical, administrative technical, administrative and food service activities 2015 2016 2017 2018 2015 2016 2017 2018

Source: Eswatini Revenue Authority

3.7.3 Corporate Debt sector, which fell by 91.2 percent year-on-year. Risks from corporate debt remained elevated Corporates in the professional and support during 2018. Corporates are still exposed to services sector and the manufacturing sector fiscal challenges, the effects of which continue recorded contractions of 60.4 percent and to linger on their balance sheets. Debt for large 25.3 percent respectively (figure 18). As such, corporates eased slightly to E7.0 billion in 2018 corporate debt as a percentage of GDP for large from E7.8 billion in 2017. The contraction was corporates fell to 16.1 percent in 2018 from most notably observed in the construction 18.9 percent the previous year (table 4).

Figure 18: Corporate Debt - Large Corporates

6,000

5,000 4,000 3,000 E'Millions E'Millions E’Million 2,000 1,000 - Activities and fishing Information & Manufacturing, communications service activities and other industrial Agriculture, forestry Real Estate activities mining and quarrying transportation storage, transportation accommodation and food

2015 2016 2017 2018 Wholesale and retail trade,

Source: Eswatini Revenue Authority

Debt for corporates in the MSME sector rose sector, which recorded an increase in debt of to E7.3 billion in 2018 from E6.2 billion 41 percent over the year under review to E2.5 in 2017. The debt-to-GDP ratio for MSMEs billion from E1.8 billion the previous year. The therefore increased from 14.9 percent in 2017 wholesale and retail sector’s debt rose by 23.6 to 16.7 percent in 2018 (table 4). The growth percent year on year to close at E2 billion at in debt was largely driven by the real estate the end of 2018 (figure 19).

Figure 19: Corporate Debt - Micro, Small and Medium Enterprises

3,000

2,500 3,000

2,000 2,500

E'Millions 1,500 2,000 1,000

E'Millions 1,500 500 1,000 - 500 - activities activities activities Activities Activities and fishing Real Estate Construction Other service other industrial and quarrying and support service Wholesale and retail Agriculture, forestry trade, transportation transportation trade, Manufacturing, mining health and social work Professional, scientific,

2015 2016 2017 2018 storage,accommodation technical, administrative technical, administrative Public administration and Public administration defence education human and food service activities 2015 2016 2017 2018 Source: Eswatini Revenue Authority

Table 4: Corporate Debt Indicators

2015 2016 2017 2018 MSMEs Debt (E’ Million) 6,802 7,028 6,151 7,264 Debt-to-GDP Ratio (%) 17.0 17.4 14.9 16.7 Debt-to-Equity Ratio (%) 129.5 118.2 109.1 120.4 LARGE CORPORATES Debt (E’ Million) 8,077 8,275 7,803 7,003 Debt-to-GDP ratio (%) 20.2 20.5 18.9 16.1 Debt-to-Equity Ratio (%) 51.8 55.8 48.2 58.7 TOTAL (MSMEs+LARGE CORPORATES) Total Debt (E’ Million) 14,879 15,302 13,954 14,268 Debt-to-GDP Ratio (%) 37.3 37.8 33.8 32.8 Debt-to-Equity Ratio (%) 71.3 73.7 63.9 79.4 Source: Eswatini Revenue Authority.

3.7.4 Risks to Corporate Debt Bank credit to corporates reveals some during 2018, which is a year-on-year increase of vulnerabilities within the corporate sector. Non- 11.0 percent from E486.5 million in 2017 (figure performing loans from corporates have been on 20). This is the highest level of non-performing the rise since 2017. The total banking sector loans that has been recorded for corporates in recorded E539.9 million in non-performing loans the past eight years.

Figure 20: Non-Performing Loans – Corporates

350 600

300 500 250 400 200 300 E'Million 150 200 100 50 100 - - 2011 2012 2013 2014 2015 2016 2017 2018 Standard 66 288 88 112 119 314 279 296 Doubtful 39 111 163 82 73 85 72 78 Loss 143 57 97 158 64 79 135 166 Total NPLS 249 457 347 351 255 477 487 540

Standard Doubtful Loss Total NPLS

Source: Central Bank of Eswatini

3.7.5 Profitability corporate sector profitability. Companies owed The average return-on-assets (ROA) and return- by government for goods and services are on-equity (ROE) ratios increased slightly from struggling to honour tax obligations, resulting 15.6 percent and 7.1 percent at the end of 2017 in penalties being charged to them by Eswatini to 16.6 percent and 6.8 percent respectively by Revenue Authority (SRA) for defaulting on tax the end of 2018 (table 4). Large corporates’ obligations (Company Survey Report, 2018). profitability has been declining since 2015, and The manufacturing sector’s profitability is also declined further in 2018 (table 5). Over the year at risk of further profit deterioration if input ended 2018, large corporates’ profitability fell and utility costs continue to rise amidst a weak by 22.2 percent year-on-year from E2.8 billion to demand for goods. E2.1 billion. A large number of sectors recorded declines in profit, namely the manufacturing, The wholesale and retail sector faces the information, wholesale and real estate sectors challenge of non-regulation in certain industries (figure 21). The high cost of raw materials, such as the car sales industry. Vehicles imported which companies have little or no control over, from overseas or purchased in South Africa are is driving up production costs and reducing infiltrating the domestic market, negatively profitability. Increasing pricing of products affecting sales and ultimately the profits of the on the other hand reduces competitiveness local vehicle retailers. Additionally, the outlook (Company Survey Report, 2018). remains uncertain as real disposable income is declining and sluggish economic performance is 3.7.6 Risks to Corporate Sector Profitability projected in the medium term (Company Survey Fiscal challenges continue to weigh on Report, 2018).

Figure 21: Profit - Large Corporates

6,000

5,000 4,000 3,000

E.Millions 2,000 1,000 - -1,000 Information and Manufacturing, mining and Wholesale and retail trade, communication quarrying and other transportation and industrial Activities storage,accommodation and food service activities

2015 2016 2017 2018

Source: Eswatini Revenue Authority

Corporates in the MSME sector performed recorded a 16.9 percent increase in profit to well during 2018 as reflected in the increase E244 million during the year under review in profits recorded in 2018. As at the end of (figure 22). 2018, profit stood at E843 million, higher than the E644 million recorded in 2017. The The average ROA and ROE ratios of MSMEs improvement in profit was largely observed increased from 11.4 percent and 4.4 percent at in the manufacturing sector (85.9 percent the end of 2017 to 14 percent and 4.9 percent increase) and the real estate sector (61.5 respectively by the end of 2018 (table 5). percent), while the wholesale and retail sector

Figure 22: Profits - Micro, Small and Medium Enterprises

300

250

6,000

200 5,000

150 4,000

E'Millions 3,000 100 E'Millions 2,000 50 1,000 - -

-50 activities activities and fishing Construction Information &

communication 2015 2016 2017 2018

service activities industrial Activities and support service Agriculture, forestry Real estate activities Manufacturing, mining health and social work Professional, scientific, Other service activities transportation storage, transportation and quarrying other technical, administrative technical, administrative accommodation and food Public administration and Public administration Wholesale and retail trade, Wholesale and retail trade, defence, education, human 2015 2016 2017 2018 Source: Eswatini Revenue Authority (SRA)

Sectoral analysis reveals that growth in real decline in tenants occupying leased property as estate was driven by an increase in rental they construct their own properties (Company property income. However, in the medium term, Survey Report, 2018). performance is threatened by the expected

Table 5: Corporate Sector Profitability Indicators

2015 2016 2017 2018 MSMEs Net Profit After Tax (E’Million) 577 8 0 0 644 8 4 3 Return on Equity Ratio (%) 11.0 13.5 11.4 14.0 Return on Assets Ratio (%) 3.8 4.9 4.4 4.9 Large Corporates Net Profit After Tax (E’Million) 6,461 5 , 3 4 9 2 , 7 6 0 2 , 1 4 8 Return on Equity Ratio (%) 41.4 36.1 17.0 18.0 Return on Assets Ratio (%) 19.8 16.4 8.3 8.0 Total (MSMEs and Large Corporates) Net Profit After Tax (E’Million) 7,038 6 , 1 4 9 3 , 4 0 5 2 , 9 9 1 Return on Equity Ratio (%) 33.7 29.6 15.6 16.6 Return on Assets Ratio (%) 14.8 12.6 7.1 6.8 Source: Eswatini Revenue Authority

CHAPTER DEVELOPMENTS AND RISK ANALYSIS 4 OF THE BANKING SYSTEM

The performance of commercial banks improved aggressively to investments and other securities over the year to June 2019. Asset growth, (238.0 percent), and balances with the CBE profitability, liquidity and funding improved. (43.5 percent), given that demand for loans and However, credit risk remains a concern as overdrafts was subdued. The majority of loans shown by the sector’s high NPL ratio, resulting were allocated to the personal/household, in a deterioration in asset quality. distribution and tourism, and real estate sectors. 4.1 GROWTH OF THE BANKING SECTOR The Eswatini banking industry currently Total loans and advances remained relatively comprises five commercial banks following unchanged at E12.1 billion at the end of June the granting of a banking licence in to Farmers 2019. As a share of total assets, total risk- Bank Limited4 to operate banking business in weighted assets increased from 89.0 percent Eswatini. to 89.9 percent between June 2018 and June 2019. Banks’ balance sheets on aggregate expanded during the year to June 2019, albeit at a On the liability side, deposits experienced a slower growth rate than in 2018. Total net 2.8 percent increase while total shareholders’ assets grew by 4.9 percent from E19.4 billion funds grew by 10.1 percent from E2.9 billion in June 2018 to E20.3 billion in June 2019 in June 2018 to E3.2 billion at the end of June (figure 23). The growth in banks’ assets was 2019. mainly due to banks allocating funds more

Figure 23: Banking Sector Assets

20.0 20.0 15.0 15.0 10.0

5.0 10.0 - (5.0) Percent 5.0 (10.0) (15.0) - (20.0) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19

Due from Banks in Eswatini Due from Banks Abroad Government Securities Investments and Other Securities Loans and Overdrafts (Gross) Asset Growth

Source: Central Bank of Eswatini

4The analysis of Farmers Bank Limited has not been included in this report as the bank is not yet operational.

4.2 CAPITAL ADEQUACY June 2019, thereby showing credit risk’s future On aggregate, banks in Eswatini were well- drain on capital. capitalized in terms of the minimum capital requirements and capital adequacy ratios as 4.3 EARNINGS AND PROFITABILITY they remained above the minimum regulatory The Eswatini banking sector’s after-tax profits ratios in the year to June 2019. All banks met increased by 33.7 percent to E524.1 million the minimum capital adequacy requirements in June 2019, up from E392.0 million in June of 4.0 percent in terms of the tier 1 capital 2018. The rise in earnings was mainly due to adequacy ratio, 8.0 percent for the total an increase in charges, fees and commissions capital adequacy ratio and the E15.0 million for (16.7 percent) and interest income from loans minimum paid-up capital. As at the end of June and advances (7.7 percent) between June 2018 2019, the aggregate industry-wide regulatory and June 2019. A 5.4 percent or E113.5 million tier 1 capital adequacy ratio and total capital decrease in banks’ operating costs during the adequacy ratios stood at 16.1 percent and 18.7 same period, largely in form of provisions for percent respectively, far above the regulatory bad debts, other interest expenses, premises, minimum requirements. This is higher than 15.5 depreciation and transport, and interest percent tier 1 capital adequacy ratio and 16.1 expenses for deposits contributed to the percent total capital adequacy ratio as at June increase in banks’ profits. As a share of total 2018. income, income from total loans and advances accounted for 54.2 percent; charges, fees and The leverage ratio (ratio of regulatory tier 1 commissions accounted for 31.1 percent and capital to total assets plus off-balance sheet earnings on government securities accounted items), which is another indicator of banks’ for 3.2 percent of total income in the year to capital adequacy, increased marginally by 0.7 June 2019. percentage points from 11.5 percent in June 2018 to 12.2 percent at the end of June 2019. Thus, key ratios of bank profitability improved in the year to June 2019. The average ROA Banks’ total shareholders’ capital increased in and ROE ratios increased from 2.0 percent and nominal terms from E2.9 billion to E3.2 billion 13.7 percent at the end of June 2018 to 2.6 between June 2018 and June 2019. This was percent and 16.6 percent respectively to the aided by growth in retained earnings for the end of June 2019. The cost-to-income ratio year by 12.4 percent or E232.3 million. also called the efficiency ratio improved by 6.0 percentage points from 78.8 percent in The ratio of total capital to total assets June 2018 to 72.8 percent in June 2019. Banks improved from 14.8 percent to 15.5 percent seem to have stabilized their operating costs from June 2018 to June 2019, further enhancing which were rising last year. The international the banks’ loss-absorption capabilities. benchmark for this ratio is 60.0 percent. On However, the ratio of non-performing loans (net average, banks’ operating expenses accounted of specific provisions) to capital worsened from for 49.2 percent of total income. 24.8 percent in June 2018 to 27.4 percent in

Table 6: Indicators of Banking Sector Profitability After-tax

Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Net profit after-tax (E. million) 438.7 510.3 399.0 392.0 524.1 ROA (%) 3.2 3.2 2.2 2.0 2.6 ROE (%) 22.3 22.4 15.7 13.7 16.6 Cost-to-income (%) 67.2 68.2 76.2 78.8 72.8 Source: Central Bank of Eswatini

An increase in profitability augments the relatively unchanged from June 2018 (figure 24). capacity of banks to build capital buffers using Careful monitoring and risk management are retained earnings to absorb unexpected future required to ensure that lending standards are shocks. The erosion of earnings over time may maintained and provisioning remains adequate. pose risks to financial stability through increased The ratio of loans to assets decreased from balance sheet risks while also reducing banks’ 62.2 percent in June 2018 to 59.2 percent in ability to build up capital buffers to absorb June 2019. This may be a sign of restructuring shocks. by the banks, moving away from lending due to weak economic growth and increasing NPLs. 4.4 CREDIT RISK However, the projected GDP growth is expected Bank lending was subdued over the year to to result in increased credit extension in the June 2019. Overall credit extended by banks near future. stood at E12.1 billion as at the end of June 2019,

Figure 24: Bank Credit Growth Rate

13.1 12.5 12.3 14.0 11.1 12.0 12.0 8.7 10.0

11.5 8.0 4.8 4.6 6.0 Percent

E. E. Million 11.0 4.0 1.9 1.2 2.0 10.5 -0.1 0.0 10.0 -2.0

Loans & Advances Annual growth (%) Source: Central Bank of Eswatini

4.5 BANKS’ ASSET QUALITY monitor these sectors as they pose a threat to Banks’ asset quality, measured as a proportion the stability of the wider banking sector. of NPLs to total gross loans, deteriorated from 7.7 percent in June 2018 to 9.2 percent in June The industry-wide decline in asset quality 2019, signifying increased credit risks in 2019. to June 2019 could be attributed to slow In nominal terms, gross NPLs grew by 19.8 economic growth. Many companies faced percent from E925.5 million in June 2018 to cash flow problems due to the slow business E1.1 billion at the end June 2019. The household environment, making it difficult to service their (44.4 percent), distribution and tourism (15.1 loans. The coverage ratio, which is measured percent), construction (7.9 percent), and as a percentage of specific provisions to total community, social and personal services (4.8 NPLs, decreased from 23.4 percent in June percent) sectors accounted for the largest share 2018 to 22.1 percent in June 2019, implying of NPLs. There is accordingly a strong need to more exposure.

Figure 25: Banks’ Non-performing Loans

1,200.0 10.0 9.0 1,000.0 8.0 7.0 800.0

6.0

600.0 5.0 4.0

E' million 400.0 3.0 Percent 2.0 200.0 1.0 0.0 0.0

Non-performing loans NPLs to total gross loans

Source: Central Bank of Eswatini

Figure 26: Sectorial Distribution of NPLs

CONSTRUCTION, 7.9 DISTRIBUTION AND TOURISM, 15.1

TRANSPORT AND COMMUNICATIONS, 6.0 HOUSEHOLDS, 44.4 COMMUNITY SOCIAL AND PERSONAL SERVICES, AGRICULTURE AND FORESTRY 4.8 MINING AND QUARRYING MANUFACTURING CONSTRUCTION DISTRIBUTION AND TOURISM TRANSPORT AND COMMUNICATIONS COMMUNITY SOCIAL AND PERSONAL SERVICES

Source: Central Bank of Eswatini

Lending for consumption and real-estate- share of total banking sector loans at 41.0 related purposes, as well as to selected percent, increasing by 3.0 percentage points economic sectors, represents banks’ main compared to June 2018. The financial well- business. As at the end of June 2019, the being of households is therefore crucial for the household sector accounted for the largest ongoing health of the banking sector as 36.4

percent of lending to the household sector is distribution and tourism sector at 15.0 percent. unsecured. Real estate loans, which include both The agriculture and forestry sector accounted residential and commercial loans, accounted for 10.7 percent of total loans as at the end of for 23.7 percent of total loans, followed by the June 2019.

Figure 27: Sectoral Structure of Lending

120.0

100.0

80.0

60.0 Percent 40.0

20.0

0.0 Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Mar-19 Mar-18 Dec-17 Dec-18 Months Agriculture and forestry Mining and quarrying Construction Distribution and tourism Transport and communications Community social and personal services Real estate Other businesses (not elsewhere included) Manufacturing Personal and household loans Other

Source: Central Bank of Eswatini

4.6 CREDIT AND FUNDING CONCENTRATION Concentration risk remained relatively high for banks in Eswatini from both a funding and lending perspective.

Table 7: Banks’ Credit Concentration Level

Description Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Average top 20 borrowers to 50.6 44.6 45.0 41.2 48.6 total loans (%) Average top 10 borrowers to 41.5 36.2 36.8 34.8 41.0 total loans (%) Average top 5 borrowers to 31.2 25.8 28.0 27.9 32.4 total loans (%) Source: Central Bank of Eswatini

On average, the top 20 largest borrowers consequences for a bank and the banking accounted for 48.6 percent of the loan book sector as a whole. In addition, 45.9 percent of as at the end of June 2019. These exposures total deposits were held by the top 20 largest should be carefully managed since a default by depositors as at the end of June 2019. Funding any of these borrowers could have far-reaching concentration is thus also fairly high.

Table 8: Banks’ Funding Concentration Level

Description Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Average top 20 depositors to 36.6 43.2 43.5 48.9 45.9 total deposits (%) Average top 10 depositors to 26.7 34.0 26.3 31.5 28.8 total deposits (%) Average top 5 depositors to 17.8 25.9 18.2 24.0 19.9 total deposits (%) Source: Central Bank of Eswatini

4.7 BANKS’ FUNDING STRUCTURE Aggressive mobilization of deposits by banks Banks in Eswatini continue to fund their saw a 2.8 percent growth in deposits to operations primarily through retail deposits. The E15.3 billion in the year ending June 2019. volume and cost of bank retail and wholesale Deposits remain the main source of funding, funding improved during the year to June 2019. comprising 75.1 percent of total assets, while This is seen as more stable than retail funding, total shareholders’ funds, the second largest and thus desirable. Liquidity indicators also source of funding, accounted for 15.5 percent show that banks have adequate liquid assets. of banks’ total assets.

Figure 28: Banks’ Sources of Funding

Due to Financial Institutions Abroad Other 1% 9% Total Shareholders' Funds 15%

Deposits 75%

Due to Financial Institutions Abroad Deposits Total Shareholders' Funds Other

Source: Central Bank of Eswatini

The growth in deposits was spread across decreased by 1.5 percent to stand at 8.7 billion. demand and savings deposits. Demand deposits The cost of deposits reduced by 0.2 percentage grew by 9.5 percent to reach E5.8 billion, while point from 3.8 percent to 3.6 percent in the savings deposits grew by 5.8 percent to E753.6 year to June 2019. million. On the other hand, time deposits

Figure 29: Structure of Deposits (in nominal terms)

7,000.0 9,800.0 9,600.0 6,000.0 9,400.0 9,200.0

5,000.0 9,000.0 4,000.0 8,800.0 8,600.0

E'million 3,000.0 8,400.0 2,000.0 8,200.0 8,000.0 1,000.0 7,800.0 - 7,600.0 Jun-17 Jun-19 Jun-18 Sep-17 Sep-18 Mar-18 Mar-19 Dec-17 Dec-18 Demand Deposits Savings Deposits Time Deposits

Source: Central Bank of Eswatini

4.8 LIQUIDITY RISK as they fall due. It is important for banks to Banks’ overall liquidity ratio rose from 30.3 maintain a stable funding profile commensurate percent in June 2018 to 32.8 percent in June with the composition of their assets and off- 2019, well above regulatory minimum of 25.0 balance-sheet activities. A sustainable funding percent. The increase may be attributed to 11.2 structure helps in reducing the likelihood percent growth in total liquid assets, which are that disruptions to a bank’s regular sources of mainly balances held with the CBE, government funding will wipe out its liquidity5. The short- securities and investments and other securities. term gap, which expresses liquid assets as a As a share of total assets, liquid assets improved percentage of short-term liabilities, stood at from 23.2 percent to 24.6 percent during the 35.2 percent as at the end of June 2019, and period under review. The ratio of gross loans demonstrates the banking sector’s reliance on and advances to gross deposits reduced to 78.9 short-term funds which in turn are used to fund percent in June 2019 from 81.3 percent in June long-term assets. This maturity mismatch is a 2018 as total deposits grew faster than total risk inherent in banking, and should be managed loans and advances. accordingly. Short-term deposits represented 91.9 percent of total deposits, showing the Liquidity held by a bank signifies its ability to volatility of deposits and emphasizing the need fund increases in assets and meet obligations for proactive liquidity risk management.

Table 9: Key Indicators of Bank Liquidity

Description Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Liquid assets to short-term liabilities (%) 25.8 32.0 28.3 35.2 35.2 Total loans to total deposits (%) 93.0 85.8 75.3 81.3 78.9 Liquid assets to total deposits (%) 21.0 27.4 25.3 30.3 32.8 Liquid assets to total assets (%) 15.7 20.0 19.7 23.2 24.6 Source: Central Bank of Eswatini

5https://www.bis.org/bcbs/publ/d295.pdf

CHAPTER STRESS–TESTING THE ESWATINI 5 BANKING SECTOR

To assess the resilience of the Eswatini banking risk types that could cause disruption to the sector to any systemic risks, the CBE performs financial system; and stress tests6 on the sector from a top-down perspective. The stresses/shocks that are • The development of risk mitigation and/or applied correspond to exceptional but plausible contingency plans across the financial sector. events. The main objectives of the tests include: The stress tests focused on two main potential • The identification of structural sources of vulnerabilities for the Eswatini vulnerabilities, overall risk exposure and banking sector, namely credit and liquidity potential interactions between different risks.

Table 10: Summary of Stress Test Shocks and Breaking Points

Risk-Type Shock Breaking Point Credit A migration of the banks’ existing total The first bank fails because of the performing loans to NPLs to the point where gradual increase in NPLs. the first bank’s capital adequacy ratio (CAR) falls below the 8.0 percent regulatory minimum requirement. Liquidity A simulated bank run test that models the The first bank’s liquid assets are number of days the banks would be able to depleted following the sudden survive a systemic liquidity drain without withdrawal of deposits. resorting to liquidity from external sources. Source: Central Bank of Eswatini

5.1 CREDIT RISK results show that 20.2 percent of performing Credit shocks were conducted to assess the loans would have to migrate to non-performing effect that a continued deterioration in asset status for the first bank’s CAR to fall below the quality would have on banks’ capital. The test 8.0 percent minimum regulatory requirement. applied a uniform shock to the baseline level of This shows that the banking system improved performing loans such that a proportion of the its resilience when compared to the 9.2 percent performing loans become non-performing. The reported in June 2018.

6Stress-testing is a risk management technique used to evaluate the potential effect of a set of specified changes in risk factors on a financial system’s condition.

Table 11: Summary of Stress Test Results for Loans Migration

CAR (%) Tier 1 NPL Number of capital ratio undercapitalized (E’ billion) (%) banks Baseline scenario 18.2 3.3 9.2 0 Shock Key Indicators Jun-2018 Jun-2019 Reduction in performing Change in NPL ratio that 9.2 20.2 loans that cause the causes the first bank to first bank to fail breach minimum CAR (%) CAR (%) 14.3 12.6 NPL ratio (%) 16.1 27.6 Tier 1 capital (E’billion) 2.4 2.1 No. of undercapitalized banks 1 1 Source: Central Bank of Eswatini

The sector-wide capital adequacy and NPL 5.2 DEFAULT BY THE LARGEST BORROWERS ratios following the shock are 12.6 percent and Assuming default by the largest borrowers 27.6 percent respectively. The migration to and a 100.0 percent provisioning Basel II and IFRS9 contributed to the resilience requirement (the ‘loss’ category for loans), of the banking sector. This has resulted in banks the results of the stress test revealed holding better quality of capital, increased that the 8.0 percent minimum regulatory coverage of risk for capital market activities CAR requirement is breached by the first and better liquidity standards among other benefits. bank after default by the top four largest borrowers compared to three from the previous years. This is an improvement in the resilience of Eswatini banking sector.

Table 12: Default by the Three Largest Borrowers

Key Indicators Dec-2015 Dec-2016 Dec-2017 Jun-2018 Jun-2019 CAR (%) 18.0 15.0 16.0 11.3 11.3 NPL ratio 7.3 19.3 23.8 16.8 20.8 Tier 1 capital (E’billion) 1.8 1.6 1.9 1.8 1.9 No. of undercapitalized banks 1 1 1 1 0 Source: Central Bank of Eswatini

5.3 LIQUIDITY RISK The resilience of banks to such a risk from Although indicators show that overall liquidity a liquidity perspective was assessed by the for banks remained at adequate levels in the number of days banking institutions would be year to June 2019, uncertainty remains about able to withstand a drain on its liquidity without the potential to have adequate liquid assets to having to resort to external support. The results fund short to medium-term funding activities revealed that the liquid assets of the four during a period of stress. banks would be depleted after ten (10) days of distress, assuming a daily withdrawal rate 5.4 SIMULATED BANK RUN of 5.0 percent on demand and savings deposits The CBE conducted a stress test for liquidity, and a 2.5 percent daily withdrawal rate on term in which a simple bank run was simulated. deposits. This has remained stable over the last few years.

Table 13: Summary of Stress Test Results for Bank Run

Key Indicators Dec-16 Dec-17 Jun-18 Jun-19 Reduction in total deposits (%) 30.2 29.3 29.6 27.5 No. of days to deplete liquid assets 8 10 10 10 No. of banks without liquidity 2 2 1 1 No. of banks breaching the regulatory 4 4 4 4 liquidity ratio Source: Central Bank of Eswatini

5.5 SUDDEN WITHDRAWAL BY THE LARGEST funds elsewhere, which may affect the banks’ DEPOSITOR liquidity positions. The results show that one The system’s largest depositor has holdings bank breaches the regulatory minimum liquidity with two banks. The depositor may decide requirement of 25.0 percent if this scenario to withdraw from both banks and invest its materializes.

Table 14: Sudden Withdrawal by the Largest Depositor

Sudden withdrawal by CAR (%) Tier 1 capital NPLs NPL Liquid assets / the largest depositor (in E’ 000) ratio total deposits Pre-Shock 18.2 3,303.2 1,108.4 9.2 32.8 Post-Shock 18.2 3,303.2 1,108.4 9.2 30.0 Source: Central Bank of Eswatini

5.6 BANKING SECTOR CAEL RATINGS

Table 15: Banking Sector Rating

Financial Soundness Indicators Mar-2018 Jun-2018 Sep-2018 Dec-2018 Jun-2019 Capital Adequacy 2.0 2.5 2.5 2.5 2.5 Asset Quality 3.3 3.6 4.3 4.3 4.3 Earnings & Profitability 2.8 3.4 2.8 3.4 2.8 Liquidity 2.0 2.0 2.0 2.0 2.0 Composite rating 2.6 2.9 3.0 3.1 3.0 Source: Central Bank of Eswatini

The banking sector remains stable, liquid and compared to the previous year. However, the adequately capitalized. However, credit risk implementation of tools such as Basel II and is increasing, in turn affecting bank earnings, IFRS9 are likely to improve banks’ resilience to which will ultimately affect banks’ solvency. risks and shocks. The sector is expected to grow This is because of heightened macro-economic in the near term as the country’s economy is risks transmitted to the banking sector through projected to grow. intermediation. Overall, risks increased when

CHAPTER FINANCIAL MARKETS 6 INFRASTRUCTURE

The CBE is entrusted with the responsibility charged at a fee of E10.00. of regulating, overseeing and maintaining a • Window 3 (13:00 – 15:30) transactions are safe and efficient payment system in Eswatini. charged at a fee of E15.00. An efficient and secure payment system is • Window 4 (15:30 – 16:00) transactions are fundamental for the proper functioning of the charged at a fee of E25.00. economy by providing mechanisms for transfer of funds and settling of transactions, and has The rationale behind the incentivized wide-ranging implications on financial stability. settlement windows’ pricing structure is to induce SWIPSS participants to process their In line with its mandate of promoting an payment instructions earlier in the day, in order efficient and safe payment system in Eswatini, to minimize potential liquidity and settlement the CBE issued the Swaziland Interbank Payment risks that the participants might otherwise face and Settlement System (SWIPSS) Rules and if most were to defer their payments towards Procedures7 on the processing of electronic funds the end of the settlement schedule. Therefore, transfers (EFTs), debit and credit instructions, this allows for the optimal use of liquidity, thus and funds transfers on SWIPSS. The SWIPSS is avoiding payment congestion as all payments recognized as systemically important payment are settled in real-time regardless of the systems (SIPS) in Eswatini, whose failure would settlement window. have an adverse impact on the wider economy. It is thus imperative that SWIPSS operates in an Payment systems in Eswatini have been efficient and safe manner to support economic undergoing changes in recent years, activity. including innovations around electronic- based payment systems. The CBE has actively 6.1 SETTLEMENT WINDOWS supported these innovations, thus promoting SWIPSS’ settlement schedule runs from 08:30 to efficiency in terms of business operations, 16:30 daily, but demarcated into four settlement cost reductions, enhanced security, and wider windows, with transaction charges varying over payment channel choice. However, these the settlement windows. To improve efficiency have come with cybersecurity threats given and encourage early processing of payment its interconnectedness and heavy reliance on instructions, the following charges apply to information technology. The CBE has intensified transactions within the following windows: its surveillance and monitoring role to identify • Window 1 (08:30 – 10:30) transactions are and take action to mitigate against these risks charged at a fee of E5.00. and vulnerabilities in a timely manner for • Window 2 (10:30 – 13:00) transactions are enhanced financial system stability.

7Further, the Rules and Procedures requires commercial banks, the CBE and any person offering funds transfers through SAECH and SWIPSS to ensure their customers are aware of their rights and obligations relating to funds transfers done through SAECH and SWIPSS. For further information and clarification, members of the public are encouraged to contact their respective banks.

6.2 SWIPSS OR MASHESHISA SWIPSS is an advanced interbank electronic SWIPSS recorded 50,749 transaction messages payment system that facilitates the efficient, worth E201.1 billion compared to 38,288 safe, secure and real-time transmission of transaction messages worth E154.2 billion in high-value funds in the banking sector. The 2018 (figure 30). This reflects increased SWIPSS Real-Time Gross Settlement System (RTGS) usage. Direct access to SWIPSS is currently activities recorded a year-on-year increase limited to the four commercial banks who act of 30.4 percent in value and 32.5 percent in as intermediaries for other financial institutions volume as at the end of March 2019 (table 16). and markets.

Figure 30: SWIPSS Usage: 2007 - 2018

250,000,000 60,000

200,000,000 50,000

40,000 150,000,000 30,000 100,000,000 20,000 Volumes Values(E'000) 50,000,000 10,000

- - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ------2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 VALUES (E'000) 31,51 52,40 61,26 68,49 89,88 88,92 113,9 117,7 121,5 140,1 154,2 201,0 VOLUMES 12,73 17,60 20,01 23,74 24,11 25,96 29,63 28,36 32,87 38,61 38,28 50,74

VALUES (E'000) VOLUMES

Source: Central Bank of Eswatini

Table 16: SWIPSS System Flows

Year Amount (E ‘000) Annual Growth (%) Messages Moved Annual Growth (%) 2007-2008 31 512 261 - 12 734 - 2008-2009 52 403 870 66.3 17 608 38.3 2009-2010 61 260 239 16.9 20 018 13.7 2010-2011 68 494 674 11.8 23 747 18.6 2011-2012 89 884 954 31.2 24 116 1.6 2012-2013 88 927 093 -1.1 25 961 7.7 2013-2014 113 923 482 28.1 29 636 14.2 2014-2015 117 780 590 3.4 28 361 -4.3 2015-2016 121 526 683 3.2 32 878 15.9 2016-2017 140 157 943 15.3 38 617 17.5 2017-2018 154 226 033 10.0 38 288 -0.9 2018-2019 201 058 038 30.4 50 749 32.5

8MASHESHISA is a Siswati name for SWIPSS, Eswatini’s Real-Time Gross Settlement System (RTGS).

6.3 SAECH SAECH is the system that facilitates the activity declined considerably both in terms automatic processing of cheques clearing and of transaction volume and value cleared and the execution of EFT transactions. SAECH settled in the year ended March 2019 (table 17).

Table 17: SAECH Volumes and Values Cleared and Settled

Year Volume Cleared Annual Growth Value Cleared Annual Growth (000’s) (%) (E’Million) (%) 2008 1,020,571 - 14,931.8 - 2009 975,461 -4.4 14,168.0 -5.1 2010 918,938 -5.8 12,840.7 -9.4 2011 859,418 -6.5 12,783.3 -0.4 2012 734,820 -14.5 10,917.9 -14.6 2013 687,820 -6.5 10,128.6 -7.2 2014 664,082 -3.4 10,212.6 0.8 2015 617,538 -7.0 9,878.9 -3.3 2016 531,763 -13.9 6,969.9 -29.4 2017 463,815 -12.8 4,714.6 -32.4 2018 403,690 -13.0 4,360.9 -7.5 2019 337,281 -16.5 3,638.2 -16.6 Source: Central Bank of Eswatini

During the year to March 2019, there were cleared through SAECH during the year ending 337,281 cheque transactions valued at E3.6 March 2018. The decrease may be explained by billion cleared through SAECH. This was a increasing adoption of alternative electronic decrease in both volume and value from 403,690 payment channels such as online and mobile cheque transactions valued at E4.4 billion phone banking.

Figure 31: SAECH Cheques Volumes and Values

1,200,000 16,000.0

14,000.0 1,000,000 12,000.0 800,000 10,000.0

600,000 8,000.0 Volumes E' E' Millions 6,000.0 400,000 4,000.0 200,000 2,000.0

- - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cheque Volumes 1,020, 975,46 918,93 859,41 734,82 687,18 664,08 617,53 531,76 463,81 403,69 337,28 Cheque Values (E' millions) 14,931 14,168 12,840 12,783 10,917 10,128 10,212 9,878. 6,969. 4,714. 4,360. 3,638. Period

Source: Central Bank of Eswatini

SAECH activity decreased significantly by 16.5 transactions value and volume is attributable percent in transactions volume cleared and to the implementation of SWIPSS, which shifted settled for the year ended March 2019, while considerable value and volume from SAECH to values also declined by 16.6 percent over SWIPSS as a result of the improved efficiency the same period (table 17). The decrease in and cost effectiveness associated with SWIPSS.

Figure 32: SAECH EFT Credit and Debit Volumes and Values

1,200,000 18,000.0

16,000.0 1,000,000

14,000.0

800,000 12,000.0

10,000.0 600,000 8,000.0

400,000 6,000.0 EFT CR EFT CR & DR Volumes

4,000.0 EFT Values (E' in Millions) 200,000 2,000.0

- - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CR EFT Volumes 204,633 266,708 327,589 425,571 498,412 544,631 691,375 775,580 816,311 915,783 1,090,02 1,130,74 DR EFT Volumes 103,022 121,401 160,344 187,050 237,984 217,828 226,428 244,997 267,029 295,843 320,527 314,465 CR EFT Values (E' millions) 1,337.5 2,673.2 3,527.2 4,446.4 5,104.8 6,082.0 7,971.9 9,616.1 10,812.7 12,810.7 14,616.9 17,129.0 DR EFT Values (E' millions) 169.5 223.4 300.9 290.3 384.4 378.7 340.1 349.9 368.2 412.4 409.4 411.1

Source: Central Bank of Eswatini

6.4 PAYMENT CARDS DEVELOPMENTS The electronic payment card market has through ATMs and point-of-sale (POS) terminals historically been dominated by commercial increased from 14.3 million transactions banks and merchants, comprising of credit valued at E16.8 billion in 2017 to 16.1 million cards, debit cards, prepaid cards and automated transactions valued at E19.0 billion in 2018. The teller machine (ATM) cards. The number of usage of cards faces competition from other active cards increased from 855,806 in 2017 to payment channels, especially from mobile 1,117,415 in 2018, while transactions processed money payment services (table 18).

Table 18: Payments Cards Usage

Year No. of Cards No. of ATMs No. of POS ATMs Transactions POS Transactions Ended Terminals Volume (Mns) Volume (Mns) 2011 187,179 160 601 8,020 1,014 2012 155,639 182 629 8,527 946 2013 381,591 189 793 9,665 1,203 2014 425,752 230 1,350 10,106 1,651 2015 384,487 255 1,704 10,348 1,997 2016 580,512 251 2,958 11,506 2,556 2017 855,806 246 3,101 10,851 3,422 2018 1,117,415 286 2,921 11,614 4,509 2019 1,515,568 281 3,444 2,596 Change (%) 30.6% 16.3% -5.8% 7.0% 31.8% Source: Central Bank of Eswatini

Figure 33: ATMs Values and Volumes 2008-2018

E 18,000,000 14,000

E 16,000,000 12,000 E 14,000,000

10,000 E 12,000,000

E 10,000,000 8,000

E 8,000,000 6,000 ('000) Volumes Values (E'000) E 6,000,000 4,000 E 4,000,000 2,000 E 2,000,000

E 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Values (E'000) E 3,701 E 4,442 E 5,248 E 5,958 E 7,055 E 8,374 E 9,719 E 11,33 E 12,62 E 14,29 E 16,09 Volumes ('000) 6,707 7,190 7,499 8,020 8,527 9,665 10,106 10,348 11,506 10,851 11,614

Source: Central Bank of Eswatini

Figure 34: POS Values and Volumes from 2008-2018

E3,500,000.00 5,000 4,500

E3,000,000.00 4,000 E2,500,000.00 3,500

E2,000,000.00 3,000 2,500 E1,500,000.00 ('000)Volumes

Values (E'000) 2,000 E1,000,000.00 1,500 1,000 E500,000.00 500 E0.00 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Values (E'000) E129,987 E387,950 E481,339 E566,480 E717,183 E984,321 E1,203,5 E1,589,0 E2,052,8 E2,496,5 E2,900,4 Volumes ('000) 499 713 774 1,014 946 1,203 1,651 1,997 2,556 3,422 4,509

Source: Central Bank of Eswatini

The growth in ATMs and POS terminals activity trend (figure 35). In 2018, the total value of indicates an increase in bank intermediation all transaction growth rate increased by 43.7 and will likely increase access to financial percent compared to 65.5 percent increase products and services over time. observed in 2017.

6.5 MOBILE MONEY TRANSFERS Mobile money operations continued to grow in Mobile money continues to deepen financial the year ended December 2018, with increases in inclusion in Eswatini, with the number transaction volumes and values, and registered of subscribers to mobile money services customers as shown in figure 36. Currently, increasing to 600,254 in December 2018 there are two mobile network operators (MNOs) from 513,287 in December 2017. The total providing mobile money services: MTN Eswatini value of all transactions annual growth in the through MTN Mobile Money, and Eswatini Mobile mobile money platform is showing a declining through e-Mali.

6.5.1 Mobile Money Activity

Figure 35: Mobile Money Transfers

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2013 2014 2015 2016 2017 2018

Number of Deposit Transactions Number of Withdrawal Transactions Number of Transfers_Person to Person Number of Transfers_Person to Business Number of Transfers_Business to Person

Source: Central Bank of Eswatini

Figure 36: Growth Rates

4,000 8,533 9,000 3,500 8,000 7,000 3,000 5,940 6,000 2,500 5,000 2,000 3,588 4,000

E'Millions 1,500 3,000 1,000 1,647 2,000 500 706 1,000 0 - 2014 2015 2016 2017 2018

Value of Deposits Value of Withdrawals Value of Transfers Total Value of All Transactions

Source: Central Bank of Eswatini

A reliable payment system instils confidence contingency planning. Under the NPSS BCP, the among domestic and international investors that SWIPSS has internal and external continuity as payments can be made consistently and reliably, well as back-up arrangements that are effective even in the most extreme circumstances. The and compatible. The backup systems are able ability of an RTGS system to provide certainty to resume and sustain critical operations of settlement without or with minimal payment following the loss or inaccessibility of one risk is an essential component of an economy’s major operating site, or following a wide-scale, financial infrastructure. regional disruption.

6.6 LIQUIDITY MANAGEMENT BY SWIPSS Going forward, the CBE expects market PARTICIPANTS infrastructure to remain stable and robust, Stable liquidity in the interbank market in June and characterized by accelerated innovations 2019 meant that the CBE was not required to and technological transformation especially in advance overnight loans to commercial banks the retail space. The regulators stand ready to in its role as the lender of last resort. SWIPSS ensure stability and appropriate risk mitigation participants did not utilize the Operating measures against potential cyber threats. Windows Extensions from April 2018 to March 2019, indicating an active and well-functioning 6.7 BANK BRANCHES AND AUTOMATED interbank market. TELLER MACHINES As at the end of June 2019, the banking sector The CBE has developed a framework for registered a decline in the number of ATMs identifying internal and external threats to from 286 in June 2018 to 281. The branch SWIPSS in order to enhance the ability of the network remained constant at 67 as at the end payment system to effectively withstand and of June 2019 (table 19). This is an indication respond to threats such as natural disasters or that banks are rationalising their branch and data breaches. Business continuity plans (BCPs) ATM operations, shifting to the more efficient include elements such as disaster recovery, alternative channels such as mobile and online business recovery, crisis management, incident banking services, cross-border remittances and management, emergency management and mobile money transfers in order to minimise operational costs.

Table 19: Number of Commercial Bank Branches and ATMs

Measure / Year Ended 2011 2012 2013 2014 2015 2016 2017 2018 2019 Change Commercial Banks 4 4 4 4 4 4 4 5 5 0 **Commercial Bank 42 42 44 42 61 65 66 67 67 0 Branches ATMs 160 182 189 230 255 251 246 286 281 -5 Source: Central Bank of Eswatini

CHAPTER DEVELOPMENTS IN THE 7 NON-BANKING SECTOR

7.1 SWAZILAND BUILDING SOCIETY (SBS) These earnings are susceptible to interest rate The Society maintained high quality capital movements. to absorb losses that may be incurred. The Society’s risk asset ratio stood at 89.1 percent as The Society maintained an acceptable level at end June 2019 while the leverage ratio stood of liquidity. The liquid assets to total deposits at 53.4 percent. Capital and reserves stood at ratio stood at 35.4 percent as at end June 2019 E1.54 billion as at end June 2019, an increase while liquid assets to total assets stood at 15.2 of 10.9 percent compared to the previous year. percent. These ratios underscore the Society’s Paid-up share capital constitutes 68.8 percent ability to meet short-term obligations as they of the capital and reserves while 24.4 percent fall due. Liquid assets of the Society mostly is made up of retained earnings. constitutes of Treasury bills (66.6 percent). The total loans to total deposit stood at 140.0 percent The Society increased its asset base by 14.5 showing that the society uses other sources of percent, reaching E2.82 billion during the year funding (equity) other than deposits to finance ended June 2019. Net loans and advances were a lending. Total capital & reserves funded 54.6 major share of assets at 60.2 percent, followed percent of total assets while customer deposits by investments at 27.2 percent while placements funded 42.9 percent of assets. with other banks stood at 4.7 percent. The Society’s lending is concentrated towards 7.2 CAPITAL MARKETS IN ESWATINI mortgages. This sector represents 68.3 percent Capital markets in the kingdom of Eswatini of lending by the Society. Non-performing loans provide the channel through which the financial to total loans marginally fell from 12.8 percent system sets prices and allocates risk and capital, to 12.5 percent during the period under review. thus playing a significant role in financial The mortgage sector contributed 93.2 percent stability. The data collection is segregated towards NPLs emphasizing the need to pay more between the collective investment schemes attention to this sector. and the investment advisors. Total assets under management for the capital markets industry During the period under review, the Society slightly improved by 3.0 percent to E25.8 billion was profitable and accumulated E99.96 million at the end of December 2018 as seen in Figure in profits, an 8.9 percent improvement from the 37. previous year. The return on assets and return on equity stood at 3.5 percent and 6.5 percent 7.2.1 Collective Investment Schemes respectively. From the profits, the Society Macro-prudential analysis focuses on the paid out E61.8 million as dividends. Its cost collective investment schemes as they have to income ratio stood at 62.7 percent, above direct control of the assets that they manage. the 60 percent benchmark. Interest from loans Figure 38 indicates that the non-bank financial is the main source of income for the society institutions have a major asset share of 49.8 and contributes 57.0 percent to total income. percent collectively (pension funds, insurance, unit trust schemes and SACCOs).

Figure 37: Progression of Assets in Capital Markets

E'Billions 26.50 26.00 25.50 25.00 24.50 24.00 23.50 23.00 22.50 22.00 21.50 21.00 Q4 - 2015 Q4 - 2016 Q4 - 2017 Q4 - 2018

Source: Financial Services Regulatory Authority (FSRA)

As at June 2019, pension funds, companies to the discretionary nature of investments of and retail mainly funded CIS. Figure 37 CIS, banks consider them to be an important illustrates that the largest source of funds is but potentially volatile source of funding. 32.4 the institutional pension, which constitutes percent of the E3.4 billion local assets of CIS are 38.9 percent of the market share, and has the deposited with Eswatini banks as at June 2019 potential of causing liquidity constraints in the and therefore close monitoring and regulation is financial system. A sudden liquidation of their required because their interruption could have investments would cause a disruption, followed serious consequences for the entire financial by companies with a market share of 27.3 system, and the economy as well by extension. percent and retail trailing at 17.2 percent. Due

Figure 38: Industry source of funds (CIS)

Retail

Professional Investors/High Net Worth Institutional-Pension

Institutional-Medical Aid Scheme

Institutional-Insurance short term

Institutional-Insurance long term

Unit Trust Schemes

Companies

Institutional-SACCO

Institutional-Other

Source: Financial Services Regulatory Authority (FSRA)

The total asset allocation of collective finance companies and securitization schemes. investment schemes shows that most of This requires close attention by regulatory its assets continues to be invested locally, authorities. followed by the CMA and offshore investments. Geographically, 58 percent is invested in 7.3 PENSION SECTOR SOUNDNESS Eswatini, 30 percent within the CMA area and 12 percent invested offshore. The CIS industry 7.3.1 Assets continues to adhere to the 50 percent local asset The amount of the sector’s assets compared requirement proposed by FSRA. The activities to the size of the domestic economy provide of the capital markets industry are sometimes an indication of the relative importance of the classified as being shadow-banking activities as retirement funds at national level. On average, they comprise of money market funds, multi- pension assets accounted for 77.3 percent of asset funds, fixed-income funds, hedge funds, seasonally adjusted real GDP in 2018 showing a fund of funds, participation bond schemes, 3.8 percent increase when compared to 2017.

Figure 39 : Assets as a percentage of GDP

100.0% 90.0% 77.3% 80.0% 73.5% 66.3% 70.0% 62.7% 60.0%

% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2015 2016 2017 2018

Total Assets to real GDP

Source: Pension/Retirement funds Annual Financial Statements, Central Bank of Eswatini

7.3.2 Asset Composition 2018 The share of foreign investments (i.e. in the Domestically, investments in equity represented South African market) of the pension sector’s the highest share of pension fund assets with a total assets has been gradually declining from 17.7 percent share in 2018, followed by loans 2015 to 2018.In 2018, foreign investment and advances to corporates and government represented 56.3 percent of the fund’s assets, bonds at 10.9 percent and 6.3 percent which was predominantly invested in fixed respectively (figure 40). Cash held within local income and equity. banks constituted a relatively small share at 3.1 percent of the pension sector assets. Overall, The stability in the investment mix is partly due 43.7 percent of the pension sector’s assets is to legal or contractual investment restrictions, invested in the domestic market. which are put in place for prudential reasons or to ensure long-term investment.

Figure 40: Asset Composition %

4.8% 4.7% 5.4% 5.7%

19.5% 20.2% 20.7% 17.7% 2.6% 2.9% 5.4% 6.3% Investment property 7.1% 7.9% 8.6% 10.9% Equity investment Govt.Securities (Bonds) Loans & Advances 63.8% Investments (foreign) 62.2% 57.5% 56.3% Cash at Bank

2.2% 2.2% 2.5% 3.1%

2015 2016 2017 2018

Source: Pension/Retirement funds Annual Financial Statements, CBE

7.3.3 Funding Ratio On average the pension sector’s funding ratio9 accrued pension liability relative to the fund’s reflects an annual declining trend over the period assets. The funding ratio close to or below 100 of 2015 to 2018.The ratio has been above 100 per cent remain a concern for the sector if low percent from 2015 but began to decline moving interest rates persist. In view of the level of close to 100 percent thus finally reaching 85.0 underfunding, salary increases, pension or any percent in 2018.The main contributor to the other benefit improvement would affect the decline is the high increase in the industry’s liabilities of the pension sector.

Figure 41: Funding Ratio

140% 125% 123% 117% 120%

100% 85% 80% Ratio 60% 40% 20% 0% 2015 2016 2017 2018

Source: Pension/Retirement funds Annual Financial Statements, CBE

9The level of assets, at market value and in proportion to accrued pension liability.

7.3.4 Distribution of Investment Income (as of investment income domestically is interest at December 2018) income from corporate loans account, which Foreign investment income accounts for the accounted 23.5 percent of domestic investment highest share in the portfolio investment of income. Income from dividends and rental pension funds at 69.9 percent as at the end income contributed the smallest share of total of 2018.On the other hand, the main source investment income (3 percent).

Figure 42: Distribution of investment income

Source: Pension/Retirement Funds Annual Financial Statements, Central Bank of Eswatini

7.3.5 Cash flow from operation ratio Financial metrics such as cash flow, can provide Therefore, investment returns should be equal early warnings of liquidity concerns and or more than the operating cash flow to avoid a solvency risk, particularly in the pension fund decrease in the pension funds asset base. sector. Cash flow measures can also highlight the annual impact of volatility for pension The pension sector has positive ratios, which fund’s comparatively healthy fiscal situations. is a sign that the sector has less money going out in benefits than coming in from current The cash flow from operation (CFO) ratio, workers. However, the aggregate trend fell to represents the difference between financial 6.3 percent in 2017 from 6.9 percent in 2016, outflows (benefits payments) and cash before before recovering to 9.1 percent in 2018.This is investments (total contributions i.e. employer an indication that the sector is less dependent and employee contributions) as a share of a on investments to pay anticipated benefits. pension fund’s assets. As overall cash flow from operations improve, If the pension fund has an operating cash flow sub-optimal investments are less likely to cause of 3 percent, for example, it would need to a drop in pension funds’ assets, which makes it achieve investment returns of at least 3 percent easier for the sector to generate returns in the that year to keep its assets from dropping. future.

Figure 43: Operating Cash Flow as a percentage of Assets

4,000 10.0% 9.1% 3,500 9.0% 8.0% 3,000 6.9% 6.9% 7.0% 6.3% 2,500 6.0% 2,000 5.0%

1,500 4.0% E'Millions 3.0% 1,000 2.0% 500 1.0% - 0.0% Benefits payments Benefits payments and contribution 2015 2016 2017 2018

Benefits Paid Total Contributions Operating Cash flow ratio

Source: Pension/Retirement Funds Annual Financial Statements, Central Bank of Eswatini

7.3.6 Pension Sector Risk 7.3.6.2 Market Risk The pension fund sector has high exposure 7.3.6.1 Concentration Risk to the fixed income and equity market which The main risk in the pension sector is poses high market risk (figure 41). Moreover, concentration risk. The industry has two main the pension funds are likely to face mark-to- players with a combined asset base of E25.6 market losses on their holdings of South African billion, representing 81.6 percent of the fixed income instruments due to South Africa’s industry assets. Total assets of the two players sovereign debt downgrading, also given the constituted about 64.8 of GDP as at 2018. On fact that 69.9 percent of the pension fund’s the other hand, the total pension industry investment income is from foreign investments. assets to GDP stood at 77.3 percent. The rising market risk is reflected in the declining trend in the JSE All Share index, owing The failure of either of these two institutions to fund large exposure to the to South African would therefore have a significant adverse Collective Investment Schemes. impact on the entire economy. This is because the pension fund sector is interconnected The fall in assets prices in 2018 had minimal with the broader financial system and the real impact on the pension fund sector, given the economy through high investments and issuance sector’s exposure to the South African Markets. of loans to corporates, as well as through The South African policy environment (property holding of debt and equity. rights through the proposed expropriation of land without compensation), depressed growth The pension sector therefore, continues to play prospects and general aversion of market risks an intermediation role between companies, drove the performance of JSE All Share Index. households and the financial markets.

Figure 44 : JSE All Share Index performance

62,000

60,000

58,000

56,000

54,000 Index 52,000

50,000

48,000

46,000 Jul Jul Jul Apr Apr Apr Jan Jan Jan Oct Oct Jun Jun Jun Sep Sep Mar Mar Mar Feb Feb Feb Aug Aug Aug Dec Dec Nov Nov May May May 2017 2017 2018 2019

Source: JSE all share index data

7.3.6.3 Credit Risk (mainly to South Africa) through CIS. The sector Domestically, the pension fund sector is exposed also has domestic exposures in CIS, domestic to default risk as 23.5 percent of the pension equity holdings, government bonds, and larges fund sector’s investment income is from interest loans issuances to corporates in the economy. bearing assets (i.e. loans and advances). As a result, the pension fund sector is susceptible to Figure 45: Pension Asset Holding in E’ Billion credit risk. as at December 2018

7.3.6.4 Systemic Risk The funding ratio of the pension fund sector reflects a declining trend, which means that the sector might be forced to reduce its investment risks. In turn, this might lead to a sell-off in some risky assets and negatively affect the prices of these assets. The size of the pension sector in the Eswatini economy is large relative to the overall size of the economy and the financial sector, and as such has systemic importance.

Figure 45 illustrates a macro network of assets as at December 2018 for the pension fund sector. The network displays the size of transactions of the pension sector among the sectors in the economy. The size of transactions (i.e. Source: Pension/Retirement Funds Annual Financial the weight of links) determines the capacity Statements, CBE of losses to flow from other sectors to pension sector. 7.3.7 Government Arrears Government overdue payments with pension There is a high participation by the pension sector (specifically with one of the top two sector in the economy as evidenced by figure players in the industry) had a huge drop from 45 in terms of financial intermediation. The 2016 to 2017 however, an increase is noticeable pension fund sector has a high foreign exposure in 2018.

Figure 46: Government Arrears

350 304 300 243 250

200

E'Millions 150 90 93 100

- 2015 2016 2017 2018

Source: Pension/Retirement Funds Annual Financial Statements, Central Bank of Eswatini

7.4 INSURANCE SECTOR The insurance sector is an important contributor 2017 to E677.1 million in December 2018 (figure to financial stability due to insurers’ links to the 46). Reinsurance premiums ceded amounted real sector. Their balance sheets, unlike those to E300.2 million as at end December 2018, of banks, are composed of relatively illiquid which was an increase from the E279.4 million liabilities that protect insurers against the risk recorded in December 2017. The industry’s net of rapid liquidity shortages that often challenge earned premiums in the year ended December banks. Insurance companies are large financial 2018 was E993.0 million, up by 6.8 percent from market investors since they invest insurance E929.1 million in the previous year. premiums from policyholders. Due to their long- term investments, they are a source of stability The insurance industry’s investment assets for financial markets. However, due to the size grew by 0.9 percent from E4.09 billion in the of their investment portfolios, fund movements previous year to E4.05 billion in December 2018 have the potential to move markets and, in (figure 46). This reflected availability of very extreme scenarios, adversely affect financial attractive investment opportunities in domestic stability. Insurance companies’ links with banks markets. The sector’s profitability was, however give an indication of the transmission channels adversely affected by an increase in the loss of potential problems between the sectors. ratio10 from 59.0 percent in December 2017 to In addition, insurance companies promote 68.2 percent in December 2018. financial stability among households and firms by insuring their risks. With regard to risks to the sector, there are emerging risks that pose a serious threat to the The insurance industry registered a 6.9 percent insurance sector even though the industry may growth in gross written premium income in the not have moved fast enough to address these year to December 2018, from E1.2 billion to risks. Such risks include fraud and cyber risk. In E1.3 billion. On the other hand, net incurred addition, most of the insurance companies are claims increased by 23.4 percent during the foreign-owned, operating under a conglomerate same period, from E548.6 million in December group structure, making it imperative to closely

10The loss ratio is the ratio of total losses incurred (paid and reserved) in claims plus adjustment expenses divided by the total premiums earned.

monitor the events and activities of such groups regulations on bank assurance were finalised, so as to ensure that the effects of such activities allowing for the use of financial institutions such do not spill over to other sectors and affect as commercial banks as a distribution channel financial stability. Moreover, one insurance for insurance products and services. Due to the company dominates both the short- and long- wide bank branch network, it is expected that term industries in terms of premiums written this distribution channel will improve access to and assets held. Based on its size, this company insurance. In addition, the insurance industry may be classified as a systemically important has developed a mobile payment platform financial institution within both the long- and which will enable vehicle owners to purchase short-term insurance industries. third-party vehicle insurance through mobile phones. The payment platform is expected to 7.4.1 Sector Developments further enhance access to insurance. In the year ended December 2017, the insurance

Figure 47: Total Insurance Industry: Assets, Gross Written Premium and Net Incurred Claims

5,000 4,500 4,000

3,500 3,000 2,500 2,000 E'Million 1,500 1,000 500 - Assets Gross Written Premiums Claims Incurred 2016 3,924 1,316 793 2017 4,720 1,209 549 2018 4,762 1,293 677

2016 2017 2018

Source: Financial Services Regulatory Authority

7.4.2 Asset Composition 46.7 percent of total assets, followed by Equities represented the highest share of bonds and bank balances at 21.4 percent insurance assets in 2018 at approximately and 17.4 percent respectively (figure 48).

Figure 48: Insurance Assets Composition %

100%

80% 43.2% 58.5% 60%

40% 17.4% 17.3% 20% 17.2% 21.4% 0% 2017 2018

Gilts/bonds Debentures Cash Bank Balances Outstanding premiums Debtors Reinsurance deposit other assets

Source: Financial Services Regulatory Authority

7.4.3 Short-Term Insurance for 2018, which improved from 40.7 and 123.0 Short-term insurance firms remained percent in 2017. adequately capitalized as at December 2018. Over the year to December 2018, the short- 7.4.4 Long-Term Insurance term insurance sector’s capital-to-asset ratio The long-term insurance industry continued to increased from 33.1 percent to 41.7 percent. play an important role in the economy through Short-term insurance firms risk retention the mobilization of savings from households and increased slightly to 63.1 percent in 2018 corporates. There was a 5.8 percent increase from 62.9 percent in 2017. This means a large to E661.7 million in the premiums written by portion of risk is passed on to the reinsurers. the long-term insurance industry for the year This arrangement limits potential losses for ended December 2018. The long-term insurance individual insurance companies. The claims industry’s capital-to-asset ratio increased to (loss) ratio for short-term insurers was low at 13.2 percent in 2018 from 12.6 percent in 2017. 32.7 percent in 2018, albeit showing a slight For long-term insurers, the claims (loss) ratio increase from the 31.7 percent recorded in was 92.0 percent in 2018, an increase from 76.7 2017. At this level, the loss ratio reflects a percent in 2017. The loss ratios for the long- sound and profitable short-term insurance term insurers were above 50 percent, reflecting industry. Total gross written premiums of the slight distress in the long-term insurance short-term insurance industry improved by 8.1 industry. percent year on year to close at E631.5 million. The average ROA and ROE ratios for the long- Short-term insurance companies remained term insurance industry rose to 22.0 and 167.0 profitable, reporting average ROA and ROE percent in 2018, from 17.8 and 141.1 percent ratios of 53.0 and 127.0 percent respectively in 2017.

7.4.5 Interconnectedness in the Financial of any spill-over effect resulting from a shock Sector to the banking sector would be minimal. Common exposures of different financial market segments could worsen the impact of Similarly, the insurance sector is closely systemic shocks and the speed with which they interconnected with the banking sector are transmitted throughout the wider financial especially through their investments in fixed system. Commercial banks are the main deposits. The insurance sector is also heavily domestic counterparties for most segments of exposed to the real estate sector through Eswatini’s financial sector. With regard to the property investments. In an effort to build capital markets, approximately 81.0 percent resilience to shocks to the sector, insurance of assets under management (AUM) by fund players are more vigilant of the risks they managers are concentrated within the financial underwrite and aware of the risk mitigation sector. The Capital Markets Department of the strategies they put in place. Financial Services Regulatory Authority (FSRA), however, is working on changing the AUM However, these segments of the financial sector reporting format to enhance the monitoring of are interconnected through mutual exposures asset concentration. The FSRA is also planning in the form of deposits, loans and advances, to introduce risk-based capital adequacy ownership interests and other instruments. requirements for fund managers to match Therefore, a shock to the financial sector the level of risk against the level of business could intensify systemic risk and cause the undertaken by the manager. spread of financial distress across the different components of the financial sector. It is therefore The retirement funds sector is also heavily imperative to continue to monitor the level of exposed to the banking sector. However, due interconnectedness within the financial sector to the deliberate diversification provided for alongside the performance of each sector. under the investment regulations, the impact

Figure 49: Financial Sector Assets - December 2018

Savings Savings and and Credit Credit CoopsCoops (SACCO's)(SACCO’s) Credit InstitutionsInstitutions Retirement Funds Funds InsuranceInsurance Collective Investment Schemes Building Society Society SubsidiariesSubsidiaries ofof SA SA Banks Banks

Financial Institutions Government owned owned Financial Financial Institituions CentralCentral Bank Bank

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

E'Million

Dec-18 Dec-17 Dec-16

Source: Financial Services Regulatory Authority & Central Bank of Eswatini

CHAPTER 8 FINANCIAL INCLUSION

It has been just over a year since the National v) Funeral Insurance - The emergence of low- Financial Inclusion Strategy was launched at the income insurance products that allow the beginning of 2018 and a stakeholder workshop consumers to pay through mobile financial with various key stakeholders undertaken to platforms. create awareness, scope current efforts and sensitize them on their roles and responsibilities vi) Medical Insurance – The introduction of in the development of the National Financial low-income medical aid products to suit Education Strategy in October 2018. Therein the financial inclusion target market. seeds were planted for various transformation initiatives in the financial sector, including the vii) Banking Fees - The Central Bank Financial Sector Charter (FSC), which have by Regulations of Banking Fees and Charges many accounts facilitated significant advances Notice of 2016, reduced the banking fees in financial inclusion in the country, including and the provision of the Mobile Money but not limited to: Transfer Practice Note No. 1/2019. i) Included population – overall financial It is also important to note that financial inclusion sitting at 87 percent (including inclusion is more than “access to credit” but both formal and informal financial is critical for reducing inequality, improving products/services) as seen in figure 50. the welfare of societies and overall economic This is an increase from 414,000 in 2014 to development. Inclusive growth also means 553,000 financially included adults in 2018. enhanced access to savings and risk mitigation The adult population accessing productive products. This means that those who were credit from the formal sector is about 36 previously marginalized will also have access to percent. a well-functioning financial infrastructure that allows individuals and companies to engage ii) Mobile Financial Services - there has been more actively in the economy, while protecting a rapid up-take of the digital financial users’ rights. services which include the e-wallet, the Instant Money, Prepaid Card, Momo Pay The third Finscope Consumer Survey 2018 and the E-mali. Mobile money access has for the Kingdom of Eswatini was launched in increased from 55 percent in 2014 to 84 May 2019, with the first one conducted in 2011 percent in 2018. followed by another one in 2014. According to the survey, “only 24 percent of the adults in iii) Remittance Payments - The introduction Eswatini have a high overall financial capability, of the remittance transfers in which the 44 percent have a moderate financial capability banks enter into partnership with the retail and 25 percent only have a low financial and the Postal Services to provide financial capability. In the 2018 National Budget Speech services. delivered by the Honourable Minister of Finance, he stated the Eswatini government’s intention iv) No Frill Bank Accounts – Banks introducing is to promote financial literacy amongst all low cost bank products for the financial citizens in partnership with Eswatini Bankers inclusion target groups. Association.

Figure 50: Financial Access %

Source: Centre for Financial Inclusion (CFI)

As financial inclusion for individuals and to better impact on all-inclusive economic microenterprises advances, new challenges growth and poverty reduction by focusing on will emerge that will need to be addressed the finance needs and uses for the bottom- to ensure that financial deepening is fair, of-the-pyramid segments of the population, broadbased and sustainable. Consumer the MSMEs and the farmers. It also includes protection will be key to maintaining the deepening of the financial sector, addressing confidence of firsttime depositors and financial the constraints that act as barriers without service users and to ensuring a level playing compromising financial stability. field with regulated players. Access to traditional financial services in sub- Financial inclusion of individuals has kept on Saharan African countries remains low and the improving throughout the recent economic share of the population having an account at, slowdown, thanks to a rethink by banking sector or borrowing from, a financial institution is players and their regulatory authorities. Digital low compared with other developed countries. financial inclusion is on the rise and has clearly Access to financial services is higher by large spilled out of Eastern Africa and is improving margins for the more educated, the top 60 access to finance in all of Africa’s regions now. percent earners, and men. Access is particularly Most success stories highlight the importance low in rural areas because branches are mostly of strategic partnerships between banks and concentrated in urban areas and non-affluent telecoms, and of an accommodating regulator. South Africans’ engagement with finance has been largely to get funeral cover. Data on On the other hand, financial inclusion also has the trends in rural areas and for women are a direct impact as an element of a pro-poor somewhat harder to access but one would be development strategy. For example, some surprised if SA did not mirror the pattern of have argued correctly that ‘access to formal marginalization and exclusion seen in other financial institutions allows poor households to parts of the continent. Despite being on the expand consumption, absorb disruptive shocks, local and global agenda, universal access to manage risks and invest in durable goods, financial services is lagging with a reported health and education’. Our key driving point for close to 2-billion adults around the world still the Financial Inclusion agenda as a country is lacking access to an account. to ensure the utilization of the financial system

Finally, the provision of access to new and economy and increasing unemployment is quality products must go hand in hand with associated with increasing numbers of middle- consumer education and protection. We need class and working-class households becoming to prevent the problems of borrower over- increasingly indebted. We all know that these indebtedness where a bleak outlook for the can plant seeds for instability and chaos that the country can ill-afford.

CHAPTER 9 SPECIAL CHAPTER

9.1 INTERCONNECTEDNESS MODEL 9.1.2 Related Literature Review A related paper is by Peltonen and Sarlin (2015)1 9.1.1 Introduction who studied the interconnectedness of the The intricate macro-network of financial banking sector as a vulnerability to crises. They links seeks to detect the vulnerability of the quantify contributions108 to systemic risk from 108 financial system. The analysis includes sector four layers of the banking system and assign level linkages presented in a macro-network these risks to individual banks. They revealed architecture. The network represent the that the moreRelated central Literature position Review of a bank in a Related Literature Review financial positions which links the institutional network increasesA related the paper likelihood is by Peltonen of a banking and Sarlin (2015)1 who studied the interconnectedness sectors of the economy. It include1 the financial crises. They further showed the importance of A related paper is by Peltonen and Sarlin (2015) who studied the interconnectedness of the banking sector as a vulnerability to crises. They quantify contributions to sectors (i.e. Banking, Insurance, Pension funds network measures in additions to early –warning of the banking sector as a vulnerability to crises. They quantify contributions to and other financial intermediaries) and non- models for bankingsystemic crises risk2 .from four layers of the banking system and assigning theses systemic systemic riskfinancial from four layerssectors of the (i.e. banking Government, system and assigning SOEs). theses systemic risks to individual banks. They revealed that the more central position of a bank in a risks to individualThus, banks. the macro-network They revealed that provides the more a mappingcentral position 9.1.3 of a bank Macro-Network in a network increases Construction the likelihood of a banking crises. Further showed the importance of the balance sheet exposures and the related The nodes sizes in the network graphs is based network increases the likelihood of a banking crises. Further showed the importance of network measures in additions to early –warning models for banking crises2 . financial risks in a complete framework. on the2 number of connections each node has in of network measures in additions to early –warning models for banking thecrises system, . while the link size in the network With the aim of understanding the linkages displays the size/estimatedMacro-Network transactions Construction among Macro-Networkbetween Construction sectors,the system presents different the sectors. The size of transactions (the weight types of risks and different roles played by each of links) determinesThe nodes the sizes capacity in the ofnetwork losses graphs to is based on the number of connections each The nodes sizessector in inthe the network financial graphs system is based either on theas anumber direct of connectionsflow from each one node sector has to in another.the system, while the link size in the network displays the size/estimated node has inholder the system, of assets/liabilities while the link size orin asthe intermediary.network displays the size/estimated transactions among the sectors. The size of transactions (the weight of links) The Macro network is constructed through the Theses links are directed, reflecting macro- transactions among the sectors. The size of transactions (the weight of links) determines the capacity of losses to flow from one sector to another. utilization of different financial instruments like network connections both sent and received determines the capacity of losses to flow from one sector to another. loans, deposits, securities (Bonds and Treasury assets and liabilitiesTheses links transactions are directed, (i.e reflecting Loans, macro -network connections both sent and received bills), and equity. Bonds and Equity and Bank Deposits).The size Theses links are directed, reflecting macro-network connections both sentof andtransactions received assets vary acrossand liabilities each transactionssector. (i.e Loans, Bonds and Equity and Bank Deposits).The assets and liabilitiesSome sectors transactions like (i.e the Loans, banking Bonds sectorand Equity holds and Bank Deposits).The size of transactions vary across each sector. size of transactionssecurities vary and across shares each directly sector. in their portfolios, A matrix of each sector’s exposure, captures it also acts as intermediary of the instruments the sectoral assetsA matrix and of liabilities. each sector’s The exposure, network captures the sectoral assets and liabilities. The A matrix ofto each other sector’s sectors exposure, in the system.captures Moreover,the sectoral some assets and hasliabilities. 14 sectors, The network the matrix has 14X issectors, of order the 14×14matrix is of order where represent the sectors like pensions have significant loan where xij represent the claims of sector i in a network has 14 sectors, the matrix is of order where represent the claims of sector in a row against sector in a column such that𝑖𝑖𝑖𝑖 and portfolios, securities and shares, increasing row against sector j in a column such that 𝑋𝑋 14 × 14 𝑥𝑥 𝑖𝑖 𝑗𝑗 𝑖𝑖𝑖𝑖 claims of sectorthe sector’s in a row exposures against tosector𝑋𝑋 certain in sectorsa column14 × 14in suchthe that𝑥𝑥𝑖𝑖𝑖𝑖 and .The macro macro𝑖𝑖 network network can can then be represented𝑗𝑗 as an matrix𝑎𝑎 = from∑ 𝑥𝑥 which economy, including cross border markets (South then be represented as an N×N matrix from 1 .The macro network can then be represented as an matrix𝑖𝑖 from𝑗𝑗 𝑖𝑖𝑖𝑖which 𝑙𝑙a𝑖𝑖 macro= ∑𝑖𝑖 𝑥𝑥 𝑖𝑖𝑖𝑖network model is constructed . 𝑁𝑁 × 𝑁𝑁 Africa𝑖𝑖 Collective Investment Schemes).𝑗𝑗 which𝑎𝑎 = ∑ a𝑥𝑥 macro network model is constructed1. 1 𝑙𝑙a𝑖𝑖 macro= ∑𝑖𝑖 𝑥𝑥 𝑖𝑖𝑖𝑖network model is constructed . 𝑁𝑁 × 𝑁𝑁 In the network, each sector is considered as a node and the total number of nodes is It is worth noting that the various instruments In the network,14.The each financialsector isrelation considered between as any a two sectors is a linkage , which is directed In the network,captures each sector exposures is considered to different as a node types and of the risk, total numbernode of andnodes the is total number of nodes is 14.The 14.The financialsuch relationas loans between to credit any risk, two depositssectors is to a fundinglinkage , whichfinancial is directed relation and weighted between by the anysize of two transaction. sectors is The Macro network is then 𝑤𝑤𝑖𝑖𝑖𝑖 constructed using and liquidity risk and also securities and equity a linkage wij, the which total is amount directed of assets and and weighted liabilities for the 14 sectors in the economy. No netting and weighted by the size of transaction. The Macro network is then𝑖𝑖𝑖𝑖 constructed using to market risks. As a result, to identify the 𝑤𝑤 by the size of transaction. The Macro network of exposures is assumed. the total amountposition of assets of each and sector liabilities in forthe the system, 14 sectors we makein the economy.is then No netting constructed using the total amount of of exposuresuse is assumed.of macro-network centrality measures. assets and liabilities for the 14 sectors in the Results

Results Figure 50 illustrates a macro network for assets and debt holding as at December 2018 for financial sectors (i.e. Banking, Insurance, Pension funds and other financial Figure 50 illustrates56 © a2019 macro Central network Bank Of Eswatinifor assets and debt holding as at December 2018 for financial sectors (i.e. Banking, Insurance, Pension funds and other financial

CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3

economy. No netting of exposures is assumed. Pension funds and other financial intermediaries) and non-financial sectors (i.e. Government, 9.1.4 Results SOEs and Households). Force-directed layout Figure 51 illustrates a macro network for algorithms was used for the nodes positioning. assets and debt holding as at December 2018 for financial sectors (i.e. Banking, Insurance,

Figure 51: Macro–network E’ Billions

Source: Central Bank of Eswatini

9.1.5 Histogram degree/connections in the financial system.This There are 4 sectors with degree between 2 - means that there are many sectors with few 4 and 6 - 8 sectors .Also there are 2 sectors connections in the network and many sectors with degree between 4 - 6 and 10 - 12. Only many connections in the network as depicted one sector with highest degree 8-10 and 12-14 by figure 52.

Figure 52: Histogram of Sectors degrees

Source: Central Bank of Eswatini

9.1.6 Financial System Centrality Betweenness measure the extent to which a Measures particular sector lies between the other sectors For the purpose of quantifying the in the network in terms of shortest path3. While interconnections and position of each sector, Closeness is a measure of influence, where the we calculate a set of commonly used centrality most central sector in the network can reach measures. Precisely, we use centrality all other sectors quickly. Betweenness and measures that provide a useful quantification closeness take into account both direct and of the individual position of each sector (node) indirect linkages capturing the position of the relative to the financial system. sector in the system4.

By measuring direct linkage linkages, in Degree- We compute the centrality measures of in (in- strength) which is the sum of all incoming the network using Balance sheet assets and linkages that each sector has. Degree-out (Out- liabilities (i.e. Loans, Bonds and Equity and strength) is the sum of all linkages coming out Bank Deposits) as at December 2018. that each sector has.

Table 20: Sector’s Centrality Measures on the Macro-Network Sectors Degree-All Degree-In Degree-Out Betweenness Closeness CFI 12 4 8 23 5% INSUARANCE 6 1 5 7 4% PSPF 11 2 9 19 6% SOCIETY 8 4 4 2 5% BANKS 13 7 6 47 6% SNPF 8 2 6 7 5% CIS 9 8 1 1 6% SACCOS 4 1 3 0 4% SOE 8 4 4 21 5% FOREIGN 2 1 1 0 3% HOUSEHOLDS 7 5 2 16 5% GVT 5 5 0 0 5% SA_CIS 3 3 0 0 4% SSX 2 2 0 0 4%

A high number of interconnections within a means that they have considerable influence network will serve as shock amplifiers rather within the system by virtue of their control on than as absorbers. Within this network players what flows in the financial system. like Credit financial Institutions (CFIS), Banks, PSPF, SNPF, Society, Collective Investment At the same time a sector that is close to many Schemes (CIS) and Insurance Sectors are highly other sectors is more exposed in case there is a connected. These highly connected sectors can shock to any other parts of the network. Almost be viewed as systemically important sectors in the sectors in the network have similar shortest the system. paths between each other in the networking terms of the closeness-centrality measures all A high degree of betweenness means that a the sectors play an important role in the spread sector has a high importance over what flows of liquidity as well as rapid spread of shocks in in the network, including potential losses in the the system. system. Banks, CFI, SOEs, PSPF, Households, have 47, 23, 21, 19 and 16 degrees respectively. 9.1.7 Hubs and Authorities These shows that these sectors are part of Hubs are the sectors with the highest number many links that connect other sectors to each of outgoing links in the network. While the other and they are likely to have informational authorities are the nodes with the highest or relational importance. Banks, CFIs and PSPF, incoming links in the network. have the highest degrees of betweenness, which

Figure 53: Hubs E’Billions

Source: Central Bank of Eswatini

Pension (PSPF and SNPF), Insurance and banks investments (bonds and holdings in CIS) as they sectors appear to be very important in the are well connected and the sizes of the links network considering the number of outgoing that originate from the sector are quite high. links. Overall however, pension sector (PSPF Pension sector has its significant exposures to and SNPF) seems to be very important in SOEs (loans), Government (Bonds) and high terms of loans issuances, and fixed income concentrated exposure to SA_CIS.

Figure 54: Authorities

Source: Central Bank of Eswatini

The cross boarder links reveal the system This confirms their crucial role in collective exposures to external shocks. The network investments, credit and deposits in the case shows that SA _CIS has significant holdings from of banks in the network. The CIS has direct the pension sector (i.e. PSPF and SNPF which participation in network with significant amount are major players in the pension sector).This of holding by most sectors in the network. means that shocks from South African market can be transmitted to network affecting the Furthermore, the government (GVT), CFIs, pension, insurance sector. society and South African-CIS have similar number of connections in the network. Their The incoming links here measures the extent to crucial role cannot be ignored due to the size which each sector is an important player in the of trades through these sectors. system and the in-degree strength or weighted degree captures the intensity of the in-coming 9.1.8 Conclusions links. CIS, and households and Banks have the This analysis has presented a simplified highest number of incoming connections in representation of connectedness of the financial the system which are 7, 5 and 5 respectively. system and how shocks can be transmitted

in the system taking into account financial interconnectedness is limited to data for sectors (i.e. Banking, Insurance, Pension funds December 2018. A more complete analysis and other financial intermediaries) and non- would require analysis on the evolution of the financial sectors (i.e. Government, SOEs). financial system interconnectedness as well as Based on annual financial statement data for interbank network. December 2018, we provide macro-network model that yields useful insights by depicting Many paths for future research include the interconnectedness of the financial system. evaluating the time series effect and include Clearly, Banks, Pension, CIS, Society, stress-test analyses5. households, GVT and SOEs for example are highly connected in the financial system and 9.1.9 References are systemically important. This in turn has 1. Peltonen, T. A., Rancan M. and Sarlin P. 2015. important implications for macro-prudential Interconnectedness of the Banking Sector monitoring and thus financial stability. as a Vulnerability to Crises. ECB Working Papers No. 1866. Furthermore the network model has revealed that a particular sector might not only be 2. Summit, R. (2016). Financial Risk and critical to the functioning of the financial Network Analysis. system infrastructure because other sectors are exposed to it, but also because other players in 3. de Almeida, L. A. 2015. A Network Analysis the system rely in the continued provision of its of Sectoral Accounts: Identifying Sectoral services. Interlinkages in G-4 Economies. IMF Working Paper No. 15/111. All the sectors play an important role in the spread of liquidity/information in the network 4. IMF. 2015. Balance Sheet Analysis in Fund as well a rapid spread of shocks in the system. Surveillance - Reference Note. This is depicted by the closeness-centrality measures of the sectors in the network. 5. Anand, K., van Lelyveld, I., Banai, Á., Friedrich, S., Garratt, R., Hałaj, G., Fique, In addition we also find that network statistics J., Hansen, I., Jaramillo, S.M., Lee, H., (such as degree, betweenness, or closeness) Molina-Borboa, J. L., Nobili, S., Rajan, S., can be useful to predict how shock spread in Salakhova, D., Silva, T. C., Silvestri, L. and the financial system. de Souza, S. R. S. 2017. The missing links: A global study on uncovering financial The analysis is not without limitations. Most network structures from partial data. ESRB importantly the model measurement of Working Paper Series No.51.

CHAPTER 10 BOXES

Box 2: SADC Macro-Economic Convergence Criteria

Southern African Development Community (SADC) Macro-Economic Convergence Criteria (MECC)

SADC comprises 16 countries, namely, free trade, customs union, a common market, Angola, Botswana, Comoros (since August monetary union and a single currency cannot 2017), Democratic Republic of Congo (DRC), take place as desired by the SADC region. Eswatini, Lesotho, Madagascar, Malawi, After the endorsement of the Memorandum Mauritius, Mozambique, Namibia, Seychelles, of Understanding by SADC Ministers of Finance Republic of South Africa, Tanzania, Zambia signed 31 July 2001, indicators (shown in tables and Zimbabwe. Macro-economic convergence, A1 and A2) were identified and are regularly according to SADC, means the balancing of monitored. There are nine MECC monitored, SADC member state economies. Without this of which three are primary indicators and are convergence, the integration milestone of progressive.

Table 21: Primary macroeconomic convergence criteria for SADC

Primary Criteria 2008 2012 2015 2018 Annual Inflation rate (average) <10% <5% <3% 3% – 7% Fiscal Deficit as % of GDP <5% <3% <3% <3% Government debt as % of GDP <60% <60% <60% <60% Sources: Convergence the Southern African Development Community (SADC): Dream or reality? Paper presented at the bi-annual ESSA conference Grahamstown 30 August to 1 September 2017 Jannie Rossouw Head: School of Economic and Business Sciences University of the Witwatersrand Johannesburg South Africa. Re-examination of the SADC Macroeconomic Convergence Criteria. Francis Z. Mbao. Bank of Zambia Working Paper. September 2011.

Table 22: Secondary SADC MECC

2008 2012 2015 2018 Current Account Deficit as % of GDP <9% <9% <9% <3% Economic Growth (real terms) 7% 7% 7% 7% External Reserves (in months of import cover) 3 6 6 6 Central Bank credit to government as % of revenues 10% 5% 5% 5% Domestic Savings as % of GDP 25% 30% 30% 35% Domestic Investment as % of GDP 30% 30% 30% 30% Sources: Convergence the Southern African Development Community (SADC): Dream or reality? Paper presented at the biennial ESSA conference Grahamstown 30 August to 1 September 2017 Jannie Rossouw Head: School of Economic and Business Sciences University of the Witwatersrand Johannesburg South Africa. Re-examination of the SADC Macroeconomic Convergence Criteria. Francis Z. Mbao. Bank of Zambia Working Paper. September 2011.

CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 10 APPENDIX

𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑠𝑠 𝑡𝑡ℎ𝑎𝑎𝑎𝑎 𝑔𝑔𝑔𝑔 𝑡𝑡ℎ𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟ℎ 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑋𝑋 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = ∑ 𝑓𝑓𝑓𝑓𝑓𝑓 𝑎𝑎𝑎𝑎𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑠𝑠 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 Box 3: Macro-networkDescription of (Sectors) Sectors NAMES DESCRIPTIONS Sectors Short Description-Data source FOREIGN CIS Foreign Collective Investment Schemes CFI Credit Financial Institutions Balance sheet data from CIS Domestic Collective Investment Schemes i.e. FINCORP CORPORATES L Loans Issued to Corporates INSUARANCE Insurance Sector data from Annual financial GVT BONDS Government bonds Statements BANKS Cash held at banks PSPF PSPF financial statements PEU Loans issued to Public Enterprises SOCIETY Annual financial statements and prudential returns SSA Loans issued to Swaziland Sugar Association BANKS Prudential returns S CFI Loans issued to Credit Financial Institutions SNPF SNPF annual financial Statements BANKS_L Loans issued to Banks SOCIETY CIS Collective InvestmentsCash holding Schemes with-financial Swaziland statement Building Society DOMESTIC EQUITY HOLDINGS data Equity Holdings with domestic Corporations SACCOS Financial Statement data Box 4: Description of SectorsSOE State Owned Enterprises excluding PSPF and SNPF; Sectors Shortfinancial Description-Data Statements source FOREIGNCFI CreditForeign Financial – i.e. cross Institutions boarder Balance sheet data from i.e. HOUSEHOLDS FLoansINCO RtoP households ;data from financial statements – INSUARANCE InsuranceCredit Institutions, Sector dataSACCOS from and AnnualSociety financial Statements PSPFGVT PSPFEswatini financial Government statements SOCIETYSA_CIS AnnualSouth Africa financial ; Collective statements Investment and Schemes prudential returns BANKSSSX PrudentialEswatini Stock returns Exchange S data SNPF SNPF annual financial Statements CIS Collective Investments Schemes-financial statement data SACCOS Financial Statement data SOE State Owned Enterprises excluding PSPF and SNPF; financial Statements FOREIGN Foreign – i.e. cross boarder HOUSEHOLDS Loans to households ;data from financial statements –Credit Institutions, SACCOS and Society

GVT Eswatini Government SA_CIS South Africa ; Collective Investment Schemes SSX Eswatini Stock Exchange data

CHAPTER 11 STATISTICAL APPENDIX

Table 23: Selected quarterly financial soundness indicators for Eswatini (percentage ratios)

Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Regulatory Capital to 23.5 22.8 23.2 24.4 17.6 18.4 18.8 18.8 18.7 Risk-Weighted Assets Regulatory Tier 1 Capital to Risk- 21.0 20.4 20.8 21.9 15.5 15.6 16.0 16.2 16.1 Weighted Assets NPLs to Total 8.2 7.4 7.6 7.2 7.7 8.1 9.1 8.6 9.2 Gross Loans Return on 2.2 2.2 2.2 2.3 2.0 2.2 2.0 2.7 2.6 Assets (ROA) Return on 15.7 15.6 15.1 15.4 13.7 15.1 13.4 17.1 16.6 Equity (ROE) Source: Central Bank of Eswatini

64 © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 6.9 4.2 4.9 6.0 4.7 0.1 7.3 9.2 3.8 2.7 41.0 15.0 10.7 12.2 16.1 18.7 Jun-19 8.6 7.5 6.1 5.4 2.9 0.8 6.8 6.8 8.6 3.8 3.2 39.4 15.4 12.4 16.2 18.8 Mar-19 8.5 6.8 6.3 5.7 3.0 0.8 6.5 6.7 9.1 3.9 3.4 38.4 16.8 11.5 16.0 18.8 Dec-18 7.2 6.9 5.6 3.0 1.0 6.6 6.2 8.1 3.9 3.3 37.1 10.1 15.2 11.1 15.6 18.4 Sep-18 9.4 7.9 6.3 5.2 2.3 1.0 6.6 6.2 7.7 5.2 3.2 38.0 14.9 11.5 15.5 17.6 Jun-18 8.8 7.6 5.8 5.4 2.3 0.9 6.6 5.8 7.2 4.6 3.1 40.2 14.6 12.1 21.9 24.4 Mar-18 2.5 7.8 7.9 5.7 2.4 1.0 6.3 5.7 7.6 4.4 3.4 41.8 16.9 11.6 20.8 23.2 Dec-17 2.1 7.9 6.6 4.6 3.2 1.0 5.8 7.4 4.2 3.6 42.4 14.0 10.3 11.3 20.4 22.8 Asset quality Sep-17 Capital Adequacy Capital 4.0 6.3 4.3 2.6 0.6 7.5 6.2 8.2 4.2 3.6 42.6 11.8 12.5 11.3 21.0 23.5 Jun-17 Sectoral distribution of gross loans (%) Sectoral eal estate Other Personal and household loans Personal Other businesses (not elsewhere included) R Community social and personal services Transport and communications Transport Distribution and tourism Construction Manufacturing Mining and quarrying Agriculture and forestry NPLs to total deposits NP L s to total gross loans Leverage ratio Regulatory tier 1 capital to risk-weighted assets Regulatory Regulatory capital to risk-weighted assets Regulatory Table 24: Commercial banks’ quarterly financial soundness indicators (percentage ratios) quarterly financial soundness indicators (percentage 24: Commercial banks’ Table

© 2019 Central Bank Of Eswatini 65 CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 6.7 2.6 -3.6 34.9 12.0 32.8 16.6 78.9 -27.7 -49.2 -72.8 Jun-19 6.7 2.7 -8.5 -3.7 71.6 11.0 34.4 17.1 78.6 -49.1 -72.9 Mar-19 5.4 2.0 -3.3 59.2 10.0 32.5 13.4 73.2 -15.8 -49.9 -76.4 Dec-18 9.0 6.1 2.2 -3.5 59.1 33.2 15.1 76.4 -17.4 -49.5 -75.3 Sep-18 8.0 7.0 2.0 -3.8 20.3 30.3 13.7 81.3 -33.0 -50.0 -78.8 Jun-18 7.0 6.6 2.3 -3.9 39.3 30.2 15.4 80.0 -35.5 -48.8 -76.7 Mar-18 6.0 6.3 2.2 -3.1 19.6 28.5 15.1 74.5 -85.0 -50.0 -76.4 Dec-17 Liquidity 5.0 6.3 2.2 -3.0 15.9 29.7 15.6 79.0 -49.9 -76.3 -181.2 Sep-17 Market Sensitivity Earnings & profitability 4.0 6.5 2.2 -3.0 29.1 25.3 15.7 75.3 -62.2 -50.2 -76.2 Jun-17 eturn on assets Foreign currency assets to foreign liabilities Foreign currency loans to foreign deposits Foreign currency exposure to regulatory tier 1 capital Total loans to total deposits Total Liquid assets to total deposits Overheads to income Cost to income Cost of deposits Net interest margin Return on equity Return R Source: Central Bank of Eswatini

66 © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 5,646 6,084 70,062 836,134 122,712 274,558 353,870 771,986 470,269 Jun-19 1,224,336 1,275,842 2,259,472 1,513,730 2,402,222 12,050,174 11,278,188 15,269,437 20,343,867 17,056,698 - - 6,328 781,161 133,533 349,303 387,147 746,667 482,619 Mar-19 1,157,437 1,501,737 1,897,551 1,695,524 2,767,737 11,634,843 10,888,176 14,807,795 20,057,352 16,845,860 - 2 6,041 746,078 125,451 358,282 842,651 591,164 736,425 439,772 Dec-18 1,034,098 1,889,336 2,229,197 2,525,334 11,719,857 10,983,431 16,014,553 20,438,411 17,359,988 - - 53,231 306,834 233,608 369,100 767,163 421,370 140,133 Sep-18 1,166,070 1,169,072 2,128,994 2,207,837 2,500,727 11,956,737 11,189,575 15,653,070 20,290,506 17,255,312 - - 8,736 59,929 262,296 362,197 998,250 344,328 850,861 405,146 Jun-18 1,232,560 1,574,311 2,006,012 2,495,195 12,067,360 11,216,499 14,852,104 19,401,937 16,437,131 - - 8,574 32,809 245,641 329,725 414,006 876,064 404,633 Mar-18 1,604,006 1,154,939 1,340,136 2,255,283 2,597,814 11,501,697 10,625,633 14,369,260 19,122,168 16,267,106 ASSETS (E ‘000) - - LIABILITIES (E ‘000) 8,506 81,030 400,134 448,660 787,371 401,609 999,849 Dec-17 1,155,433 1,039,581 1,501,431 2,379,496 2,350,542 11,203,631 10,416,260 15,038,607 19,537,427 16,710,544 - 9,479 36,087 42,553 14,004 329,183 164,920 768,717 399,013 856,513 Sep-17 1,224,043 1,523,295 2,099,974 2,562,536 11,738,552 10,969,835 14,858,880 18,919,273 16,212,943 8,910 52,497 45,013 314,327 603,553 734,389 394,317 818,095 127,210 282,520 929,756 Jun-17 1,241,425 2,782,930 2,053,307 10,745,634 10,011,245 14,269,865 18,271,698 15,672,271 Deposits Balances with CBE Due from banks in Eswatini Due from banks abroad Government securities Investments and other securities gross loans & Total advances LESS: Provisions Net loans & advances Net fixed assets Other assets ASSETS TOTAL Due from banks in Eswatini Due from banks abroad Borrowings from CBE Bills Payable Other liabilities LIABILITIES TOTAL Cash & cash assets Table 25: Commercial banks’ quarterly balance sheet 25: Commercial banks’ Table

3,807,569 - 84,396 40,379 141,029 723,020 Mar-19 2,117,699 341,556 3,106,522 1,897,747 1,025,267 3,264,569 - 82,752 39,337 371,640 711,727 Dec-18 1,768,000 372,394 2,973,456 1,413,827 1,420,193 3,206,413 - 82,752 39,337 229,222 711,393 Sep-18 1,870,007 455,977 2,932,710 1,496,564 1,958,074 3,910,615 - 82,752 39,337 175,250 689,631 Jun-18 1,877,607 443,365 2,864,577 1,184,412 2,119,366 3,747,143 82,752 39,337 109,617 662,273 Mar-18 1,909,812 390,707 2,803,790 1,170,457 1,462,332 3,023,496 - - CAPITAL (E ‘000) CAPITAL 82,752 39,337 271,636 645,415 Dec-17 1,737,554 432,245 2,776,693 1,083,749 1,728,802 3,244,796 OFF-BALANCE SHEET ITEMS (E ‘000) OFF-BALANCE SHEET - - 82,752 39,337 153,162 644,264 Sep-17 1,735,539 403,652 2,655,053 1,242,813 1,763,057 3,409,522 - - 82,752 39,337 43,002 644,122 Jun-17 1,740,038 411,357 2,549,250 1,223,651 1,604,553 3,239,561 - - Unused loans/overdrafts commitment Share premium reserves Retained Other reserves/ subordinated debt ( current Profit-Loss year) SHAREHOLDERS’ TOTAL FUNDS Guarantees & performance bonds Other off-balance sheet items OFF-BALANCE TOTAL ITEMS SHEET Letters of credit Paid-up capital Paid-up Source: Central Bank of Eswatini

68 © 2019 Central Bank Of Eswatini CENTRAL BANK OF ESWATINI | FINANCIAL STABILITY REPORT Issue No. 3 6,890 88,424 90,079 32,563 40,721 90,485 62,905 150,594 845,476 546,363 633,294 642,828 739,468 Jun-19 215,400 524,068 1,474,375 2,722,232 1,982,764 5,675 89,429 81,362 30,380 75,546 85,650 62,456 165,596 793,581 548,677 609,789 645,146 727,893 Mar-19 196,369 531,524 1,449,393 2,685,286 1,957,392 87,946 69,883 19,615 89,452 12,475 77,739 77,667 130,044 656,834 520,853 537,354 539,592 546,451 Dec-18 148,349 398,102 1,258,357 2,312,132 1,765,680 9,823 81,090 74,276 26,990 94,906 75,664 148,071 748,444 546,710 100,790 569,996 616,657 628,716 Sep-18 187,093 441,623 1,374,579 2,548,356 1,919,640 9,916 69,848 24,033 87,634 223,640 136,668 724,784 111,645 560,132 601,959 196,213 640,369 563,327 Jun-18 391,987 171,340 1,368,933 2,659,550 2,096,223 48,794 156,596 Mar-18 175,678 - - 1,352,101 187,698 162,896 712,930 144,355 560,333 575,474 631,787 607,733 432,055 66,891 2,608,775 2,001,042 9,960 INCOME (E ‘000) EXPENSES (E ‘000) Dec-17 158,811 - - 1,300,197 189,675 142,764 647,693 105,629 461,133 125,782 579,682 559,321 578,583 419,773 65,526 60,677 86,306 2,451,484 1,872,901 Sep-17 158,798 - - 1,282,888 185,092 138,563 642,226 107,770 445,469 134,744 570,494 549,351 571,949 413,150 59,507 59,303 84,737 2,416,046 1,844,097 Jun-17 163,500 - - 1,269,196 182,646 126,302 621,071 111,652 422,861 133,702 558,793 550,949 562,511 399,010 56,761 59,907 78,906 2,367,629 1,805,118 Interest income on advances Interest income on Government securities Interest income on deposits abroad Interest income - others Charges, fees and commissions Foreign exchange income Other income INCOME TOTAL Interest expense on deposits Provisions for bad debts Provisions Other interest expenses Salaries, wages, staff costs Premises, depreciation, Premises, transport Other expenses TOTAL EXPENSES TOTAL Net profit before tax LESS: Corporation tax LESS: Corporation NET NET AFTER PROFIT TAX Table 26: Commercial banks’ quarterly income statement, year-on-year figures 26: Commercial banks’ Table Source: Central Bank of Eswatini

NOTES